European Union officials are working on plans to boost bankcapital to contain the euro-region's debt crisis, the InternationalMonetary Fund said, as Moody's Investors Service warned ofdeteriorating public finances.

“There is no secret at all that European authorities and theEuropean Commission are all working together on a plan to bringmore official capital, more public-sector capital, into the bankingsector,” Antonio Borges, the IMF's European department head, saidtoday in Brussels. “We would recommend that it move to a Europeanapproach,” he said. “More should be done on a cross-borderbasis.”

European bank stocks climbed, with France's Credit Agricole SAand Dexia leading the 46-member Bloomberg Europe Banks andFinancial Services Index 2.6 percent higher. Credit Agricoleclimbed 9.4 percent to 5.14 euros of 12:50 p.m. in Paris trading,while Dexia was up 7.2 percent to 1.08 euros.

Signals that European politicians may step up efforts to aidbanks and push investors to take deeper losses as part of a Greekbailout reflect international pressure to end the debt crisis anddomestic opposition to expanding rescues.

Moody's Investors Service late yesterday followed itsthree-level downgrade of Italy by warning that euro-area nationsrated below the top Aaa level may see their rankings cut.

European banks may need more than 140 billion euros ($186billion) of capital through a program similar to the U.S. TroubledAsset Relief Program, Morgan Stanley analysts say.

“Policy makers increasingly want to build a large solvencybuffer,” the analysts led by Huw van Steenis said in a note today.“We think banks in core Europe need to be recession proofed andbanks in the periphery depression proofed.”

Dexia Plans
At the same time, officials inFrance and Belgium are preparing a bailout for Dexia SA. Dexia willpool its troubled assets into a “bad bank” with Belgian and Frenchgovernment guarantees to protect depositors and itsmunicipal-lending business after struggling to fund itself.

The lender may hive off its French municipal loan book into aventure funded by state-owned La Banque Postale and Caisse desDepots et Consignations, and seek buyers for its Belgian bank,Denizbank AS in Turkey and its asset-management division, accordingto a person with knowledge of the talks.

EU spokesmen moved to damp speculation triggered by a FinancialTimes report late yesterday on progress toward a bank-recapitalization plan.

EU Economic and Monetary Commissioner Olli Rehn “doesn't speakof a concrete plan in hand,” his spokesman, Amadeu Altafaj, saidtoday in Brussels. “He speaks of an initiative, of discussions inprogress and he pleads for a European approach.”

No New Plan
The commissioner “clearlyindicated he doesn't have a new recapitalization plan,” thecommission's chief spokeswoman, Pia Ahrenkilde Hansen, said.

The speculation about efforts to support banks followed afinance ministers' meeting in Luxembourg in which officialssignalled their intent to prod investors to cover more of the costof bailing out Greece.

“Many euro countries have now realized that the July deal is tooadvantageous for investors and there's too little investor burdensharing,” Finland's Finance Minister Jutta Urpilainen said today inHelsinki. “This was discussed at Monday's euro group; how can wefind a way to increase burden sharing? No solution's been putforward so far.”

Greek Swap
Banks are negotiating a bond swapwith Greece that would cut the nation's debt load at a cost toinvestors estimated at about 21 percent. They pushed back atsuggesting deeper losses.

It would be “counterproductive” to reopen the Greek deal nowthat investors have signaled support and the euro area's 17parliaments are close to ratifying the agreements, Charles Dallara,managing director of the Institute of International Finance said,said in a telephone interview yesterday. IIF represents more than450 banks and took part in the July 21 negotiations that led to asecond rescue package for Greece.

When the bailout was announced, banks and other bondholders wereexpected to contribute about 50 billion euros alongside 109 billioneuros in public funds and a proposed 20 billion-euro debt buyback.German Finance Minister Wolfgang Schaeuble told reporters inLuxembourg yesterday that the deal may require “adjustments”depending on whether Greece has met its commitments and otherdevelopments.

Greek 10-year bonds trade for about 39 cents on the euro andtwo-year notes for about 43 cents, according to data compiled byBloomberg.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.