* EU Finance Ministers meet to discuss pressure on banks
* Italy strikes out at recapitalisation plan
* Political impasse could prompt ECB to act
By John O‘Donnell and Francesca Landini
BRUSSELS/MILAN, Nov 30 (Reuters) - EU finance ministers examined ways to revive lending among European banks on Wednesday, but disagreement over how best to reinforce financial institutions with new capital looked to have put an immediate solution to the problem out of reach.
Banks’ reluctance to lend to one another is a source of growing alarm at the European Central Bank, which has struggled to thaw the freeze with half a trillion euros of liquidity and fears it could undermine attempts to tackle the sovereign debt crisis.
The EU’s 27 finance ministers, meeting on Wednesday, had been due to sign off details of a 106-billion-euro plan to recapitalise banks, intended to revive confidence among nervous counterparts who have shunned EU lenders.
But a backlash from countries like Italy, which can no longer borrow at affordable rates and would struggle to find the nearly 15 billion euros the EBA watchdog said it needed to help its struggling banks, has raised doubts over the programme.
The head of the Italian markets authority Consob questioned the way the EBA (European Banking Authority) had worked out the banks’ capital shortfall and said a drive to strengthen their finances risked exacerbating a credit squeeze.
Giuseppe Vegas told la Repubblica daily on Wednesday that Consob is in talks with the Bank of Italy to ask for a reassessment of these rules.
“In Italy there is a banking worry,” Vegas said. “Money is not circulating anymore. The main risk is a spread of a credit crunch.”
The EBA, which is in charge of the recapitalisation drive, has said Italian banks need almost 15 billion euros in order to reach a tier one capital ratio of 9 percent by June next year.
Other countries such as Germany have also challenged the EBA over its calculations.
The remarks from Vegas echo recent comments from Giovanni Ferri, an academic who sits on the EBA’s expert advisory group, who argued that Italian banks should not be forced to make provisions for a collapse in value of the country’s bonds.
“Including the exposure to bonds of their own country to assess banks’ recapitalisation requirements makes no sense, since a bank is in any case affected by the default of its own country,” he said, adding that recapitalisation would do little to protect banks in such circumstances.
The ministers are also set to reject proposals to combine state guarantees across the EU into a single scheme for banks, an idea academics and financial experts had said was necessary.
It will now be up to individual countries to stand behind their lenders if they experience difficulty borrowing.
But while such a move may work for economically strong countries like Germany, it will do little to lift confidence in banks in weaker states such as Spain or Portugal.
A similar guarantee by Ireland for its financial system ultimately overwhelmed it, forcing it to seek an international bailout.
If banks and countries are struggling to raise capital, they can theoretically turn to the euro zone’s EFSF rescue fund as a last resort, although that has also been thrown into doubt by the struggle to leverage up the EFSF’s own resources.
The political impasse on both fronts would add to the case for the European Central Bank to intervene more aggressively to help banks.
Last week, people familiar with the matter said the ECB was looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent a credit crunch.