France heralds Europe move on bank stress tests

PARIS Thu Jun 17, 2010 12:28pm BST

French Finance Minister Christine Lagarde takes part in a live Reuters Insider event to talk about the euro zone debt crisis, the impact on France and whether the future of the euro is now in doubt, in Paris June 17, 2010. REUTERS/Jacky Naegelen

French Finance Minister Christine Lagarde takes part in a live Reuters Insider event to talk about the euro zone debt crisis, the impact on France and whether the future of the euro is now in doubt, in Paris June 17, 2010.

Credit: Reuters/Jacky Naegelen

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PARIS (Reuters) - France backs rapid publication of bank "stress tests" to counter financial market fears over their ability to cope with the debt crisis that spilt out of Greece, the French economy minister said on Thursday.

Signalling a change of European tune that Washington has pressed hard for, Christine Lagarde said in an interview with Reuters Insider TV that such tests were underway at a European level and she hoped results could be released "in the next few weeks."

"There is nothing more damaging than rumours, suspicion, doubts and uncertainty," she said.

"If someone suspects you have an illness, it's all very well to say no, no, no I'm very healthy, but it's even better if you say ok, fine, take my blood and make sure that I'm healthy."

Lagarde said European Union leaders would discuss the issue at a summit on Thursday but she already knew Germany and Spain did not have a problem with publishing results.

In France, such tests of bank solidity were not yet finished but looked reassuring, she said.

"We will stress the system a little more to make the results more credible," she said, but so far "the ratios hold well for all the system."

As Lagarde spoke, French central bank chief Christian Noyer, also a member of the European Central Bank's governing council, said in a statement given to reporters: "I am still in favour of publishing European stress tests by country and by bank."

Minutes later, a German finance ministry spokesman said his country would back publication of stress tests because markets were nervous, but that the matter would need to be discussed by EU finance ministers.

On publication timing, Lagarde said: "My hope is the next few weeks and certainly the end of July would be ideal."

Figures issued by the Bank for International Settlements in late April showed that French and German banks had the largest lending exposure to Greece and Spain.

HITTING THE BRAKES

Greece, the first country to require a rescue in Europe's 11 years of monetary union, accounts for less than three percent of the euro zone economy but Spain, focus of recent market worries, accounts for more than 10 percent.

U.S. Treasury Secretary Timothy Geithner, who calmed markets by publishing tests done on U.S. banks last year, has renewed pressure on Europe to do likewise.

Previous tests in Europe were made public only in broad terms last October, with no reference to individual banks.

Lagarde said France, often accused of ignoring EU rules, was determined along with other euro zone governments to slash recession-inflated debts as promised.

After the recession of 2009 prompted stimulus spending that added to the debt burdens of many major industrialised economies, restraining spending is "like having a car and having to work on two pedals at the same time. You accelerate and brake at the same time but the desire clearly is not to go into the wall but to stay on the road," said Lagarde.

"We need to tip-toe out of our stimulus packages," said the minister, whose government on Wednesday announced plans to raise the legal retirement age from 60 to 62 to alleviate strains on the state-sponsored pension system.

She was speaking hours before the EU summit in Brussels and a few days before leaders from the G20 economic powers meet in Toronto to discuss global economic cooperation.

EUROPEAN ECONOMIC GOVERNMENT

Lagarde said it was hard to bridge the gap between financial markets that wanted fast answers and the relatively slow pace of decision-making in a monetary union that spans 16 countries.

She described the 750-billion-euro anti-contagion package announced by European governments on May 10 as a historic achievement, but distanced herself from suggestions by International Monetary Fund chief Dominique Strauss-Kahn that this agreement and the institution it creates to manage rescue funding could also be used to promote higher economic growth.

"It's a vehicle that's set up for three years. That was the intention from the start and it was at the particular insistence of some member states including Germany that it not be regarded as a long-standing, sustainable institution," she said.

"So we incorporated the entity with a view to closing it down in three years time when it's no longer needed."

Paris has long pushed for what it calls European economic government but Berlin has so far refused to back a push by President Nicolas Sarkozy for a more permanent institutional arrangement where leaders of euro zone countries would work on policy with a joint secretariat to support them.

"When you have a monetary zone where the common good and the currency is the euro it makes sense to have an economic pilot, somebody who actually governs," said Lagarde.

Finance ministers do much of the policy conferring at the moment but Lagarde said they tended to look at issues and numbers "in isolation" and without the broader view that could be ensured at the level of heads of state and government.

(Writing by Brian Love; with additional reporting by Crispian Balmer, John Irish and Gus Trompiz; Editing by Ruth Pitchford)

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