The International Monetary Fund signalled its readiness to extend its support to ailing eurozone economies yesterday, saying it could buy Spanish or Italian debt alongside the currency union's beefed-up bailout fund to restore confidence among investors.
Antonio Borges, the European head of the Washington-based organisation, also urged European countries to shore up their banks to the tune of €100bn to €200bn in order to boost investor confidence.
Against the backdrop of problems at the Franco-Belgian lender Dexia, Mr Borges said action was needed to bolster banks across the continent, not just in France, where lenders have sparked concern as investors attempt to gauge their exposures to debt-laden countries such as Greece, in focus again yesterday as workers staged a general strike in protest against austerity cuts forced upon the country.
The managing director of the IMF, Christine Lagarde, has called for similar action in the past.
"There has been a lot of talk about French banks but... the problem is very widespread. No banking sector in the world can sustain a generalised loss of confidence and we need to restore that confidence all over Europe," Mr Borges argued, adding that the sums involved were manageable. He also said that the European authorities were working on plans to "bring more official, public capital into the banking sector precisely to restore confidence".
The prospect of action to protect the banking sector lifted stock markets, with Germany's Dax climbing by 4.7 per cent and London's FTSE 100 rising by more than 3 per cent, although volumes were relatively low.
"We are talking about figures of between €100bn and €200bn, which in our view is very, very small compared to the size of the European capital markets and compared to... the new, enhanced EFSF," Mr Borges said, referring to the revamped European Financial Stability Facility, which, once it has been approved by national parliaments across the 17-country bloc, will have powers to lend money to governments for the purpose of shoring up lenders.
The German Chancellor, Angela Merkel, a key political player in the eurozone debt crisis, indicated her openness to the idea. "I think it is important, if there is a general view that the banks are sufficiently capitalised for the current market situation, that one does it," she said.
Beyond the banks, and in a sign that the IMF was prepared to wade deeper into the eurozone to ease the sense of crisis, Mr Borges indicated that the Fund could pick up Spanish or Italian bonds alongside the EFSF, which, in its new incarnation, will have powers to intervene in the secondary bond markets to ease the pressure on eurozone states. "We would certainly be ready to play that role," he said.
"Because the EFSF now has the ability to invest in secondary markets, we could invest alongside them to support the debt markets in Italy and Spain with an additional element of credibility," he said, adding that the key thing was to restore confidence in the two southern European countries.
"These economies... should normally have access to markets – the difficulties they are having today is because of the high degree of risk aversion."