The Washington, DC-based international organization says stress tests are a key opportunity to fix banks by forcing those found to be weak to raise new capital, which can be done by investors or government stumping in more money.
The issue is important to the rest of the economy because a number of banks hold Greek, Irish and Portuguese debt, complicating efforts to resolve those countries debt problems. A default or restructuring of that debt could hit banks so hard they wouldn’t be able to loan money to companies, spreading financial trouble to the wider economy.
The IMF estimates that the 17 countries that use the euro will see growth of 1.7 percent this year and 1.9 percent next year, if debt crises don’t derail the economy.
“Financial linkages between countries with sovereign debt troubles and the rest of Europe could potentially pose more risk to the outlook,” the IMF said in its regional economic outlook for Europe released Thursday.
With banks holding bonds from indebted countries, “a shock to confidence could spread quickly throughout Europe.” The European banking regulator is running stress tests on banks, with results due in June. A set of tests last year was regarded as too easy to restore confidence in the system.
