U.S. banks to repay funds; German news adds gloom

Robert Zoellick, president, The World Bank Group, speaks at the International Economic Forum of the Americas conference in Montreal June 8, 2009.

NEW YORK (Reuters) - U.S. officials gave 10 of the country's largest banks approval on Tuesday to pay back $68 billion in federal funds, a sign their balance sheets may be healthy enough to let them operate more independently.

Goldman Sachs, JPMorgan Chase & Co and Morgan Stanley were among institutions that announced they are returning the Troubled Asset Relief Program funds. The Treasury Department did not name any of the banks.

"This is not a sign that our troubles are over; far from it," U.S. President Barack Obama said on Tuesday. "The financial crisis this administration inherited is still creating painful challenges for businesses and families alike. But it is a positive sign."

U.S. stocks rose moderately on Tuesday, with gains limited by concerns that the banks' repayments would detract from their ability to lend more to consumers and businesses.

"Partly what that's telling you is that banks are spending all their money paying back the government and not doing what that money was intended to do, which was to stimulate the economy and lend that money," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co.

Optimism about a global economic recovery also was tempered by news that German exports tumbled and one of its top retailers filed for insolvency.

The United States is expected to press European countries to put their banks through more rigorous tests to ensure that the institutions survive if the economy worsens, the Wall Street Journal reported.

U.S. Treasury Secretary Timothy Geithner is likely to raise the issue in Italy later this week during closed-door meetings with finance ministers from the Group of Eight leading nations, according to the paper.

"Geithner thinks most of his work with U.S. banks is done, and he's demanding European regulators should redo their bank stress test," said Christopher Low, chief economist of FTN Financial in New York. "The focus is going to shift to those banks who are not repaying TARP."

Banks that do not return TARP funds will see pressure on stock prices and will likely try to return the funds by the end of the year, he said.

Stress tests for banks in Europe and the United States have been a long-standing request from the G8 nations, which will continue to apply pressure at this weekend's G8 talks, Canadian Finance Minister Jim Flaherty said on Tuesday.

The U.S. government conducted tests on the 19 largest U.S. banks to assess their exposure to risky real estate and other loans. Nine banks last month were considered healthy enough that they did not need to add more capital, while the other 10 were told they needed to boost capital cushions by a combined $74.6 billion.

U.S. personal and corporate bankruptcy filings rose in the first quarter to the highest level since 2005, according to the latest government data, as rising unemployment, falling housing prices and tight credit made it harder for people to hold off their creditors.

GERMAN EXPORTS, INSOLVENCY

In Europe, German exports and industry output tumbled and one of its top retailers filed for insolvency on Tuesday.

Although analysts say the outlook is brighter for the months ahead, after billions of dollars of state bailout money has been pumped in worldwide, jobless queues are growing and demand remains weak in the real economy.

"Recently there have been some signs of a stabilization of the economic situation. Even if we may have passed the phase of sharpest declines in output, no rapid recovery in the world economy is in view," European Central Bank governing council member Erkki Liikanen said in Finland.

German exports dipped 4.8 percent month-on-month in April, after rising in March for the first time in six months. Imports tumbled at an even faster pace to their weakest performance since November 2008.

Industrial output in Europe's biggest economy also fell in April, the Economy Ministry said. Analysts had forecast a small rise.

"These figures show you cannot yet give the all clear," Andreas Rees, of Unicredit, said of the trade data. "It is only a question of time, however, until we see an improvement."

EASTERN EUROPE

Collapsing industry pushed economies in eastern Europe into recession in the first quarter, data from Romania, Hungary and the Czech Republic showed on Tuesday.

With the fear of job cuts still hanging over the economy, consumers are curbing their spending on the British high street, a survey showed.

Bearing the scars of a collapse in consumer demand, German retail group Arcandor AG (AROG.DE) filed for insolvency on Tuesday after the Berlin government rejected its request for emergency aid. [nL9454449]

NOT ALL GLOOM

But data from France and Japan suggested better times ahead.

The indexes of coincident and leading economic indicators in Japan, the world's second biggest economy, each rose 1.0 percent in April from March -- leading the Cabinet Office to say that while the economy was worsening, there were signs of it may be reaching a bottom.

"Judging by the coincident index, there is a chance that March was the bottom for Japan's economy," Susumu Kato, chief economist at Calyon Capital Markets Japan.

Economists in France took heart from data showing the trade deficit had narrowed in April, and the Bank of France saying the economy was expected to shrink less in the second quarter than a previous estimate.

International Monetary Fund chief Dominique Strauss-Kahn said late on Monday the biggest risk to recovery was countries taking too long to cleanse toxic assets from their banking systems after a U.S. housing market bust in 2007.

(Reporting by Reuters bureaux worldwide; Writing by Walden Siew; Additional reporting by Noah Barkin and Ellis Mnyandu in New York; Editing by Eric Walsh)