EU divided over measures to avoid credit crunch

[November 09, 2011]  BRUSSELS (AP) -- The European Union is still divided over how to get banks within the 27-country bloc to keep lending to each other as they struggle to avoid a credit crunch that could further hurt economic recovery.

Finance ministers at their meeting in Brussels Tuesday discussed different schemes to guarantee lending between banks, but failed to agree on a common approach amid disagreement over whether states should share the risk of the guarantees.

Lending between banks has slowed markedly on recent weeks amid concerns about the weakness of lenders and how they could be hit by Greece defaulting on its debts and further declines in the bond prices of Italy and other wobbly countries.

Many banks have had to turn to the European Central Bank for extra liquidity, but the slowdown in lending threatens to also hit credit to businesses and individuals.

After the collapse of U.S. investment bank Lehman Brothers in 2008, many European countries guaranteed lending between their banks in an effort to stop the credit crunch. However, this uncoordinated approach raised questions over fair competition as schemes were often only open to banks based in the country that was offering the guarantees.

The European Commission, the EU's executive, is pushing for a pan-European guarantee scheme, in which stronger states would pool their guarantees with those of weaker ones to keep credit flowing.

"For the commission a coordinated European approach to these guarantees and a degree of mutualization of the offered guarantees is essential for breaking the vicious circle between fragile banks and countries in difficulties," said Michel Barnier, the EU's internal markets commissioner.

However, several countries are reluctant to take on that risk.

Polish Finance Minister Jacek Rostowski, whose country currently holds the EU presidency, said his counterparts discussed two potential guarantee schemes, that would offer more coordination than the state-by-state approach seen during the credit crisis.

"Most countries thought that certainly a degree, a high degree, of coordination in terms of rules, pricing and screening for state aid was a good idea," Rostowski said after the meeting. "I think that's an important step forward."

The first option would see every state remain responsible for its own guarantees but ensure greater coordination on the cost and the criteria for accessing them, Rostowski said.

A second approach, proposed by the European Investment Bank, would set up a syndicate of guarantors, Rostowski said, without giving more details. "That clearly needed more work," he added.

[Associated Press; By GABRIELE STEINHAUSER]

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