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IMF adds weight to Draghi's eurozone banking union call

The IMF added its voice Thursday to calls led by ECB head Mario Draghi to set up a centralised eurozone "banking union" complete with common backstops and guarantees. "Decisive steps toward more complete financial integration would complement the growth agenda and weaken the adverse bank and sovereign feedback loop," International Monetary Fund deputy managing director Nemat Shafik told a conference of economists in Brussels. Fallout from the European debt crisis has thrust problems in the banking system back at the top of the agenda, with the problem at its most acute in Spain. There, analysts say that the bursting of property and credit bubbles in a country struggling under recession and massive unemployment has brought the government to the verge of calling for bailout aid from eurozone partners, which usually also involves the IMF. Shafik said that the building blocks for a genuine single market for finance on a continent where countries have different languages as well as traditions "would involve providing banking support from a common resource pool independent from national sources." This should happen "sooner rather than later," she said, four weeks from a summit of European Union leaders originally called to decide on measures to boost anaemic growth after two years of harsh austerity. "To ensure that banks which receive pan-European support are properly restructured and supervised, these banks could over time be made subject to centralised regulation and supervision, through a joint bank resolution authority with a common backstop and a single deposit insurance fund," Shafik spelled out. A pan-European financial system "would entail some fiscal risk-sharing" and "restoring stability and confidence will require additional pooling of sovereignty," she added. Like Draghi and EU economy commissioner Olli Rehn, Shafik said that greater fiscal integration more than any pooling of future debt via common issuance of eurobonds "would contribute to lowering sovereign yields" and improve access to money markets. She said that this approach "would decouple banks from sovereigns and reduce deleveraging pressures," in turn easing the supply of credit and so boosting investment. As striking Spanish miners protesting against cuts to coal subsidies clashed with police in Madrid, Shafik stressed that there is no immediate alternative to sustainable public spending. However, she nuanced that by saying governments had take account of growing "reform fatigue," adding that the IMF "has learned the hard way how important it is to protect social cohesion."