Rehn Says EU Is Seeking to Break Link Between Banks, Governments

European Union Economic and Monetary Affairs Commissioner Olli Rehn said officials in the EU are seeking to break a “negative spiral” caused by links between distressed euro-area governments and banks.

“Life has been actually continuous conference calling in the last couple of days for quite obvious reasons because we’ve had to finalize not only the long-term perspective but also the more immediate, short-term, perspective of market stabilization,” Rehn told a conference today in Brussels.

He spoke after finance ministers held a conference call on Spain and Cyprus, the fourth and fifth euro nations to seek emergency aid following 386 billion euros ($481 billion) in rescue pledges to Greece, Ireland and Portugal. EU leaders meet tomorrow, their 19th gathering to tackle the debt crisis.

Rehn said European policy makers must examine short-term actions including steps to ease the connection between governments and banks.

“We need to be ready to consider more immediate measures to stabilize financial markets, especially government bond markets,” he said. “The weakening of the negative links between the sovereigns and the banks is a key issue in this respect because, for the moment, we are in a situation where we have a negative spiral between banking problems and the sovereign-debt crisis.”

Rehn said debt sharing, an idea supported by distressed euro governments and opposed by German Chancellor Angela Merkel, may take years because it would require deeper economic integration.

Mutualizing Risk

“More mutualization of sovereign risk would require more, deeper, economic integration before it could be accepted by all Europeans,” he said. “At the same time, more fiscal integration would likely involve more explicit pooling, further pooling, of sovereignty and this may be possible only in the medium to long term.”

Rehn signaled that Spain, whose aid program of as much as 100 billion euros is centered on bolstering banks, will fail in its push to have them recapitalized directly by the permanent European rescue fund rather than via the national government. Direct funding of the banks would ease Spain’s debt burden.

Rehn said the accord on the euro-area rescue fund doesn’t foresee aid flowing straight to banks and such a possibility, which he said he supported when the rules were being drawn up, will require more centralized European regulation to address the concerns of some nations. The German government opposes direct European aid to recapitalize lenders.

“My reading of the positions of the member states is such that we need to have a strong and genuine euro-area banking regulatory authority in order to ensure that, especially the larger banks but basically all banks in Europe, are equally and effectively supervised,” Rehn said. “The question of direct bank recapitalization should be seen in this context.”

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