IMF calls for stress tests for banks in Europe

PARIS: The IMF wants to see banks in Europe subjected to stress tests like those applied to US banks, it said on Tuesday while forecasting European recovery next year if governments take firm action.

And it urged the European Central Bank to cut its key interest rate even further.

In European countries, "policy makers should shift to a more proactive approach," IMF Europe director Marek Belka told reporters.

"They need to subject financial institutions to rigorous stress tests and force them to recognise losses and recapitalise or resolve them where needed."

Last week, US authorities reported the results of its own stress tests, which used special formulae to assess the assets and risks of big US banks - the sector where much of the world financial turmoil began.

They concluded that 10 of the 19 banks assessed needed to boost their capital.

Financial markets took the results as reassurance that remaining problems at the banks were manageable, and stock prices firmed.

Belka was presenting a report on the economic outlook for Europe which estimated that European economies would recover in the second half of next year if authorities took new measures mainly to help the financial and credit sectors.

"Further policy action, especially in the financial sector, is required to restore market trust and confidence in all countries," the IMF said in its latest regional economic outlook report for Europe.

"Even assuming more forceful policy actions, the downturn is likely to last until early 2010, and the subsequent recovery is expected to be gradual," the report forecast.

The IMF has forecast that Europe's economy will shrink by 4.2 per cent in 2009 and 0.1 per cent in 2010.

Central banks in Europe have lowered their interest rates considerably to cope with the crisis.

Belka suggested the European Central Bank, which has taken its key rate to a record low of 1.0 per cent, had scope to go even further, but stressed that other non-conventional monetary measures were becoming more important.

"Further room to reduce interest rates should be exploited swiftly, and additional unconventional easing will have to be considered," the IMF report said.

It said Europe's emerging economies would shrink by 4.9 per cent in 2009 but that a recovery in this zone in 2010 would be slightly stronger than in Europe's advanced economies.