July 18, 2012 8:57 pm

Banking union is a priority, says IMF

The International Monetary Fund has called on the eurozone to make banking union its priority.

The IMF said on Wednesday that a credible road map towards a common supervisory framework, deposit guarantee scheme and bank resolution authority were needed to stop shocks hitting one eurozone member from imperilling the entire bloc.


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“The immediate priority for the eurozone is to establish a banking union and move toward more fiscal integration,” said Mahmood Pradhan, a deputy director in the IMF’s European department and mission chief for the euro area.

The IMF warns in a report that the lack of a banking union means the pernicious link between the poor financial health of governments and the instability of the region’s banking system is “stronger than ever”.

The vicious cycle between sovereigns and their banks is leading to increasing fragmentation of financial markets, the IMF says, with capital flowing from southern European countries to northern member states.

“These developments are not consistent with a properly functioning economic union,” Mr Pradhan said. “The common monetary policy is not working the way it was intended.”

In a conference call on Wednesday, IMF officials said the European Central Bank should now undertake quantitative easing. The IMF said eurozone quantitative easing should involve buying debt from all of the sovereigns that form part of the currency bloc.

The amount of debt bought from each member state would be determined by the ECB’s capital key, which means more than a quarter of the bonds bought would be those issued by the German government.

The IMF has consistently urged eurozone officials to do more to alleviate the region’s twin financial and sovereign debt crises.

Many of the measures it has proposed have been at odds with those backed by the German government.

Separately, an IMF official on Wednesday said European officials had taken a welcome step forward in improving the terms of Ireland’s bank rescue so that the country could fully return to the bond markets.

Ajai Chopra, who is also a deputy director of the fund’s European department, commended European officials’ commitment, made at the end of June, to examine the terms of Ireland’s €85bn bailout.

“What’s encouraging is there seems to be a new political mandate to make meaningful progress in this area,” Mr Chopra said.

The IMF is one of three institutions handling the Irish bailout, the others being the European Union and the ECB.

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