IMF sees Europe recovery in 2010 with tough measures

PARIS: The IMF forecast an economic recovery in Europe next year provided governments enact firm financial measures as the EU Tuesday said some of its banks will undergo "stress tests" like their US counterparts.

IMF Europe director Marek Belka said that in Europe, "policy makers should shift to a more proactive approach" to clean up their troubled banks.

"They need to subject financial institutions to rigorous stress tests and force them to recognise losses and recapitalise, or resolve them where needed," he told reporters in Paris.

Officials in Brussels promptly said EU finance ministers had agreed in principle to the tests at a meeting last week and details were being hammered out with the aim of presenting the results to ministers in September.

Last week, US authorities reported the results of 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 needed to boost their capital.

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

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

"Further policy action, especially in the financial sector, is required to restore market trust and confidence in all countries," the IMF said.

"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 4.2 percent in 2009 and 0.1 percent in 2010.

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

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

"Macroeconomic policies will need to continue to support demand while keeping an eye on the medium and longer run," the IMF report said.

"Further room to reduce interest rates should be exploited swiftly and additional unconventional easing will have to be considered."

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

"The banking sector could also hold a key to the speed of the recovery in emerging Europe," the report said.

"Measures to support credit, for instance through bank recapitalisations, can hold off a tightening of credit conditions, support consumption and prevent recessions from becoming overly protracted in some countries."

The European bank tests are "about finding out if there is something we should worry about," said an EU official in Brussels on condition of anonymity.

"Now is the time for regulators to work and the report will be presented in September."

"The idea is to have a sample of systemic, representative banks, but not all of the banks," another EU official said, also on condition of anonymity.

European banks have suffered dearly from the turmoil that began in the US housing market. Many European countries last year rushed to bail out banks and guarantee lending between them.