IMF's Vinals: EU Bank Union Delay Could Reignite Crisis

The European Union risks a resurgence of the financial crisis if it allows politics to delay banking union plans, the International Monetary Fund’s Jose Vinals said today.

“Moving decisively without delays, without any important political disagreements along the path of the banking union is something which is fundamental,’” said Vinals, director of the IMF’s monetary and capital markets department, in an interview with Bloomberg Television in Washington today.

If financial-system problems aren’t tackled properly, “then we could see a reignition of market turbulence and a drop in market sentiment,” Vinals said.

European Union officials are divided on the next steps toward banking union after agreeing to put the European Central Bank in charge of euro-area bank supervision. Nations are set to clash over plans to centralize the handling of failing banks, as Germany warned that the bloc is running out of room to adopt crisis-fighting measures under its current treaties.

German Finance Minister Wolfgang Schaeuble told his EU counterparts at a meeting in Dublin April 12-13 that there isn’t enough of a basis in the EU’s current rulebook for building a common authority and fund for bank failures. Other nations, including France, Luxembourg, and Denmark, are urging swift progress on putting in place a resolution system, amid concerns that treaty changes would cause unacceptable delays.

Credit Constraints

Vinals said the EU needs to take more action. As things currently stand, “credit will not flow in a significant manner in Europe” because banks aren’t strong enough to lend to good-quality borrowers, he said.

Five euro-area nations so far have received bailouts amid the 17-nation currency area’s sovereign debt crisis, which also has required trillions of euros in financial-sector support. Investors are now looking to see whether Slovenia will become the sixth nation to request aid, as that nation works to repair its banks and maintain access to sovereign debt markets.

Vinals said the banking sector in Slovenia, which is largely state-owned, is smaller and in better shape than its Cypriot counterpart. “It’s very important to distance the case of Slovenia from the case of Cyprus” as developments unfold, he said.

“The authorities have already taken measures to address these problems” in Slovenia, Vinals said. “Whether they can do it fully on their own or not, it’s something that is not for me to speculate now.”

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