By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) Monday advised the Euro Area to recapitalise frail but viable banks as part of the area’s task to address important tail risks, stabilised financial markets and grow its economies.

This is coming on the heels of the recommendations of 2013 Article IV Consultation with the Euro Area by the IMF mission.

According to the mission, task number one (1) is to repair bank balance sheets to revive credit which is essential for economic recovery.

The IMF mission said faced with high funding costs; weak banks are unable to recognise losses. “This perpetuates uncertainty about the quality of their assets, hinders fresh private capital injections, and ultimately restrains credit. To reverse these dynamics, bank losses need to be fully recognised, frail but viable banks recapitalised, and non-viable banks closed or restructured,” the IMF said.

Also, the IMF affirmed that a credible assessment of bank balance sheets is necessary to lift confidence in the euro area financial system.

“A comprehensive, forward-looking asset quality review should quantify any capital shortfalls, but with a clear plan on how to meet potential capital requirements,” the Fund said.

Task number two (2) according to the IMF is to move to full banking union reverse fragmentation, the IMF said this would introduce a systematic approach to supervision and incentives for early intervention in frail banks; halt ring fencing at the national level, and weaken bank-sovereign links.

“This calls for expediting the reforms in train. The recent agreement by the European Council on the Bank Recovery and Resolution Directive (BRRD) helpfully lays out the pecking order in the event of bank intervention. The next steps on the agenda include: adopting the enabling legislation for the Single Supervisory Mechanism, reaching final agreement by the European Parliament on the BRRD, and making progress on the Deposit Guarantee Scheme Directive,” the IMF  said.

As part of task two (2), the IMF said, a strong single resolution mechanism is critical to ensure timely and least-cost resolution of banks and the goal should be a centralised authority with power to trigger resolution and make decisions on burden sharing.

The IMF further affirmed that more support from the European Central Bank (ECB) could also help reduce fragmentation. “While monetary policy alone cannot address underlying weaknesses in bank balance sheets, it can provide additional funding to avert a further contraction in credit until the more comprehensive actions to restore banking system health take hold,” the IMF said.

On task three (3), the IMF said its necessary to provide sufficient near-term support, given weak growth and subdued inflation, more monetary easing will likely be necessary to support demand.

“Further policy rate cuts, including negative deposit rates, would support demand across the euro area and address deflationary pressures. The ECB’s forward guidance will help anchor interest rate expectations, which is now even more necessary because of market uncertainty about the exit from unconventional monetary policies in the United States,” the Fund said.

Also, the IMF said the recent extension for some countries to meet deficit targets will moderate the downdraft from fiscal consolidation on growth but more flexibility may be needed.

While task four (4) is to implement structural reforms to lift growth and foster rebalancing.

According to the IMF, for the euro area as a whole, a targeted implementation of the Services Directive would remove barriers to protected professions, promote cross-border competition, and, ultimately, raise productivity and incomes.

“A new round of free trade agreements could provide a much-needed push to improve services productivity. In addition, further support for credit and investment could be achieved through EIB facilities. The securitisation schemes proposed by the European Commission and the European Investment Bank could also underpin SME lending and capital market development,” the Fund said.

The IMF said as part of its task four (4) recommendations, there is the challenge to boost growth and create jobs calls for concerted policy action at the pan-European and national levels.

“The benefits of a comprehensive reform effort—tackling financial fragmentation and structural weaknesses—could be significant over the medium term, and have positive spillovers. They would raise the level of euro area and global output, respectively, by about 3 percent and 1 percent within five years,” the IMF affirmed.