IMF Says More Europe Banks `May Fail' as Recapitalizing Slows

By Simon Kennedy

Oct. 21 (Bloomberg) -- The International Monetary Fund said more European banks may fail as they struggle to raise fresh capital from investors.

In its annual review of the European economy published today, the Washington-based lender said financial markets are now ``paying increasing attention'' to pure leverage rather than accounting for how risky it is. By that measure, Europe's banks score less favorably than those in the U.S., it said.

As sovereign wealth funds and investors show diminished appetite for putting money into banks and volatile markets make it hard to raise capital, Europe's financial institutions will find their ability to raise funds falling and the need for government support growing, the IMF said.

``While recapitalizing initially went well, it is now likely to slow,'' the Fund said in the report. ``Additional banks may fail.''

European banks have raised $266.7 billion in new capital since the start of 2007 amid losses and writedowns of $228 billion in that time, according to Bloomberg data. Governments are now providing support, with France announcing late yesterday that it will provide BNP Paribas SA, Societe Generale SA and four other French banks with 10.5 billion euros ($14 billion).

The banking stress is now feeding into the broader economy as companies and consumers find their access to credit shut off, the IMF said. Economies where housing booms occurred, such as Denmark, Ireland, Spain and the U.K., will see the sharpest downturns, it said.

`Major Downturn'

``We are facing a major downturn in all countries,'' Alessandro Leipold, acting director of the IMF's European department, told journalists in Brussels today. ``Most economies are going to experience a recession into early 2009, followed by a very gradual recovery.''

The Fund repeated its forecast of Oct. 8 that the 15-nation euro area will grow 0.2 percent next year and the continent as a whole will expand 1.4 percent. Emerging markets may expand less next year than the 4.3 percent anticipated, it said.

``Activity is expected to stagnate in most advanced economies in the near term,'' the IMF said. ``With adjustment in the financial sector likely to be arduous and protracted, a modest recovery is expected only later in 2009.''

As inflation slows, ``scope for easing monetary policy has emerged,'' it said. The central banks of the euro area, the U.K. and Sweden all cut interest rates by a half percentage point on Oct. 8. Emerging markets that have overheated may find it harder to cut rates given wage pressures persist, the IMF said.

Governments may also have room to spend more although they should focus on alleviating the financial turmoil and ensure budget deficits remain within limits, it said.

`Hard Landing'

Emerging-market economies are ``also feeling the strain'' and risks of a ``hard landing remain elevated in parts of the region'' after a surge in current-account deficits increased reliance on foreign capital, according to the report. Policy makers should use currency reserves and budgets to cushion any slowdown in capital flows, the IMF said.

``They need to draw up contingency plans for hard landings,'' Leipold said. ``Up to a certain point, their resilience was remarkable, but they certainly now are feeling the full blast of the crisis.''

The Fund said the turmoil should spur coordination between the region's governments. When the crisis passes, governments and central banks may also want to increase regulation to reduce the likelihood of future asset-price gains sparking surging investment, it said.

To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net