BRUSSELS (Reuters) - European leaders agreed on Thursday to publish details of “stress tests” showing the financial health of individual banks next month and to toughen budget rules to restore confidence in their currency union.
The euro rose to a three-week high against the dollar and concerns about Spain’s financial health eased somewhat after Madrid’s successful sale of 3.5 billion euros in 10- and 30-year bonds.
The build-up to a European Union summit had been dominated by concern that Spain, the euro zone’s fourth biggest economy, might have to tap a 500 billion euro ($613.2 billion) safety net set up to halt contagion after last month’s rescue of Greece.
Although pressure on Spain abated slightly, the head of the International Monetary Fund expressed concern that efforts to tighten financial regulations to prevent another global economic crisis were flagging.
The EU tried to address such concerns by setting out plans for closer economic policy coordination and agreeing on more transparent stress tests for top European banks.
“We established that all 27 (EU) countries have committed themselves to pushing through an improvement in transparency through stress tests and to publish that in July,” German Chancellor Angela Merkel said after the summit in Brussels.
“If anyone has anything to hide, it will come out anyway at the end of the day. That is why we have taken all measures in the meantime with bank rescue packages and the euro shield.”
Germany had been skeptical about releasing the details of stress tests for its banks, which were hit hard by the global financial crisis and have billions of euros in Greek debt on their books. It dropped its objections after France and Spain came out strongly in favor of the move.
The euro, which fell to a four-year low against the dollar last week, rebounded to its highest level since late May after the Spanish bond sale and comments from a Spanish Economy Ministry source, who said the Treasury did not need to sell any more debt to meet a 24 billion euro repayment crunch in July.
European shares gained for a seventh successive session and the premium investors demand to hold Spanish bonds rather than German benchmark issues narrowed. The spread had shot up to a record high earlier on Thursday.
“The results of the Spanish auction are helping restore confidence and that’s also supporting the euro,” said Francois Chevallier, strategist at Banque Leonardo in Paris.
Hoping to convince investors they can contain the euro zone debt crisis, EU leaders said countries that do not meet budget and debt targets should face tougher sanctions and that budget plans should be submitted to the EU executive for peer review before national parliaments.
They also agreed on the need for a European bank levy and said they would propose a financial transaction tax to the Group of 20 developed and developing countries at a summit in Toronto on June 26-27. Some of Europe’s partners oppose the idea.
But IMF Managing-Director Dominique Strauss-Kahn said more global efforts were needed on financial regulation and on tightening economic policy coordination in Europe.
“I’m sometimes worried about a loss of momentum. Now leaders are losing some momentum to do things together at the global level,” he told a conference in Italy.
“The euro zone today is in the middle of the river. The single currency cannot work without economic coordination and hopefully this crisis will convince governments that coordination is the way forwards.”
U.S. Treasury Secretary Timothy Geithner has been pressing Europe for months to follow Washington’s lead and come clean about the state of bank balance sheets.
The EU has so far conducted only one stress test of its entire banking sector, not individual countries or banks. The results in autumn 2009 said the sector was sound and could withstand a much worse economic downturn than had taken place.
German Bundesbank head Axel Weber said on Thursday a new set of European bank stress tests was needed and the IMF backed more transparency on European banks. An EU source said the process would involve bank-by-bank tests of Europe’s 25 biggest lenders.
Germany is home to regional Landesbanken that were hit hard by the crisis and have yet to fully recover. The government has been concerned that publication could force it to stump up more money for its financial institutions — a move that could further dent the popularity of Merkel’s center-right coalition.
Other countries appear confident that the release of stress tests will boost investor trust in their banks.
“I cannot speak for other countries but certainly as far as (French) banks are concerned, I know that there is willingness to publish and no trepidation and no anxiety as to what will come out of it,” French Economy Minister Christine Lagarde told Reuters Insider television.
The crisis has forced countries such as Spain and France to bring forward long-delayed plans to reform their labor market and pension system..
Greece is also pressing ahead with an austerity program designed to turn around its uncompetitive economy and bring down its swollen debt and deficit.
The EU, IMF and ECB, which are overseeing a 110 billion euro rescue for Greece, said on Thursday its reforms were “on track.”
But trade unions across the bloc oppose the wave of budget cuts and are vowing to step up protests over the coming months. Public and private sector unions have announced a one-day strike in Greece on June 29 in protest at labor and pension reforms.
(Reporting by Steve Clarke, Paul Taylor, Crispian Balmer, Brian Love in Paris, Timothy Heritage, Jan Strupczewski, Andreas Rinke in Brussels, Madeline Chambers in Berlin)
Writing by Noah Barkin; Editing by Mark Heinrich