“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.”
“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr. Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.”
In a sign that European governments were preparing to act, Wolfgang Schäuble, the German finance minister, said Berlin could, if necessary, reactivate support mechanisms it put in place in 2008 to recapitalize the banks. The mechanisms had expired and the German government had until now insisted they were not needed.
“Everyone said the big concern is that worrying developments on the financial markets will escalate into a banking crisis,” Mr Schäuble said at a press conference.
Some of the biggest banks in France, Germany and Belgium hold tens of billions of euros in sovereign bonds from struggling peripheral eurozone countries, which have seen their bond values plummet amid fears Greece is close to defaulting on its debts.
George Osborne, Britain’s chancellor, said: “It’s clear now that the European banking system needs to be strengthened and needs more capital.”
Markets have been unsettled again this week by troubles at Dexia , the Franco-Belgian lender, which holds 3.5 billion euros in Greek bonds and 15 billion in Italian bonds and has been struggling to raise enough short-term cash to run its day-to-day operations.
The French and Belgian governments said they would take “all necessary measures” to prop up Dexia.
US equities dipped into bear market territory at one point on Tuesday – defined as a drop of 20 per cent from the previous high in April – although the S&P 500 index recovered to push into positive terrain. Britain’s FTSE 100 dropped 2.6 per cent, closing at 4,944.
The mounting concerns over a Greek default sparked a sharp fall in banking stocks and a flood of money into US Treasuries and German Bunds.