Europe Should Use Bloc’s Rescue Fund to Save Banks, Borg Says

Swedish Finance Minister Anders Borg said euro-area members should “seriously” consider tapping the region’s rescue fund to help troubled banks as the debt crisis worsens.

“It would be good if they from the European side could provide slightly more clarity about how these firewalls should be used so that they perhaps could have a little bit more of a flexible view on the banks,” he told reporters today in Stockholm. “It would be a measure they should think about; whether the European Stability Mechanism should get a slightly more flexible role.”

Spanish Prime Minister Mariano Rajoy on June 2 called for a more robust “banking union” in Europe, lending his support for a centralized system to re-capitalize struggling lenders. Concern over the future of the euro was rekindled last month as Spain’s bank industry showed signs of further deterioration and speculation grows over a Greek exit from the 17-member bloc.

Any bank help should have “significant haircuts” and be done through common equity, Borg said. “Then there is a possibility to get the money back.”

German Chancellor Angela Merkel on June 2 toughened her opposition to euro-area debt sharing, telling members of her party in Berlin that “under no circumstances” would she agree to German-backed euro bonds. The European Union is targeting July 9 as the start date for its permanent euro-area rescue fund, the 500 billion-euro ($620 billion) ESM, an EU official said last week.

Crisis Banks

“It’s difficult to see how we can sort things out without dealing with crisis banks,” said Borg, whose country isn’t a member of the euro bloc. “If they leave Spain to its own devices, then there is a big risk that this crisis just continues and that, in the end, Spain will be forced into a bailout package.”

The European debt crisis has so far pushed Ireland, Greece and Portugal to resort to bailouts as it has entered its third year. Europe’s economy is struggling to escape recession as euro-area unemployment has reached a record, manufacturing output contracted for a 10th straight month in May and the currency plunged close to a two-year low against the U.S. dollar.

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