European Central Bank

Bloomberg

The European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending.

Political squabbling in Europe over ways to fight contagion and delays in implementing agreed measures are raising concerns about the risk of defaults by governments, the IMF said. Banks in turn face “funding challenges” because of investor concern about their potential losses from government bonds they hold, with some relying heavily on the European Central Bank for liquidity, it said.

“A number of banks must raise capital to help ensure the confidence of their creditors and depositors,” the IMF wrote in its Global Financial Stability Report released Wednesday. “Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy.”

Bloomberg report said the Washington-based IMF Tuesday cut its global growth forecast and predicted “severe’ repercussions if policy makers fail to stem the debt turmoil that’s threatening to engulf Italy and Spain. Bank recapitalization, through public injections if necessary, should come in addition to “credible” strategies by governments to reduce their public debt, the IMF said Wednesday.

The ECB and peers in the U.K., Switzerland, Japan and the U.S. last week said they’ll provide unlimited three-month money to lenders in three tenders starting October. That was after funding dried up for European banks in general, and French lenders in particular, amid concern Greece is headed for a default.

Credit Agricole SA (ACA) and Societe Generale SA had their long- term credit ratings cut one level this week by Moody’s Investors Service, which cited their reliance on short-term funding and Greek exposure.

The fund said its assessment of the potential credit risks of European banks isn’t a calculation of their capital needs, which would require a “fully fledged stress test.” It said its analysis was based on published data from the European Banking Authority’s stress test and Bank for International Settlements figures.