IMF warns of €200bn hole in Europe's banks

The global financial system is "back in the danger zone" and there is a potential €200bn (£175bn) hole in the European banking system, according to the International Monetary Fund.

In its latest Global Financial Stability Report (GFSR), published yesterday, the IMF warns that risk levels across the international financial system are at their most elevated level since the collapse of Lehman Brothers in 2008 and that governments and regulators must take urgent action to avoid a similar disaster occurring.

"Time is running out to address existing vulnerabilities," said the GFSR report, which singles out European banks as particularly at risk.

The IMF asserts that banks across the Continent urgently need to raise capital if they are to withstand the raging economic turmoil.

It said: "Weak banks need to be restructured and where necessary resolved. If private capital is not available and national public balance sheets have no spare capacity, EU-wide public backstops should be used."

IMF managing director Christine Lagarde, caused a diplomatic row last month when she said European banks were undercapitalised, which embarrassed leaders of eurozone countries.

Although she seemed to retreat from that assessment at the G7 meeting in Marseille earlier this month, yesterday's report confirms the IMF's original hardline position and will ratchet up pressure on European governments to restructure their banking sectors.

The IMF arrived at its €200bn figure by calculating the market's view of the increased credit risk of holding the sovereign bonds of troubled European nations since 2009.