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Euro zone debt crisis warning from UK

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Euro zone debt crisis warning from UK
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There are warnings over the euro zone’s debt crisis from a Bank of England policymaker and Britain’s new risk monitoring organisation.

American economist Adam Posen from the central bank’s Monetary Policy Committee says there’s a growing risk that rescue plans for debt-stricken European countries will end badly.

And Britain’s Financial Policy Committee says the crisis poses the biggest threat to the UK’s financial stability and banks must reveal their full exposure.

The Financial Policy Committee also turned up the heat on UK banks to use strong profits to boost the amount of capital they keep in reserve to cope with emergencies.

Bank of England Governor and Financial Policy Committee Chairman Mervyn King also said a roadmap was still needed to show markets there was a way out of the Greek debt crisis, and the watchdog’s report focused heavily on the risks posed by high-indebted euro zone states.

“Sovereign and banking strains are the most material and immediate threat,” it said. “Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems.”

Adam Posen urged euro zone governments to tackle their banking problems, adding a “refusal” by politicians in Germany and elsewhere to recognise banks’ losses and accept their need for recapitalisation was restricting Europe’s debt crisis response.

“The risk is rising that the whole rescue action will end in disaster,” Posen wrote in a guest column in the German business daily Handelsblatt.

Speaking separately in Berlin, he said Europe must recapitalise banks in order to overcome the debt crisis.

“To solve the crisis, the financial systems of the core European countries have to be fixed,” Posen said at a conference. “It is important to recognise the actual debt crisis is driven by the financial crisis.”

Only when the banks — via higher capital cushions — are more crisis proof, can the markets better separate the risks of a Greek restructuring from the situation in the rest of Europe, he wrote in Handelsblatt.

“Instead of putting still more money into rescue funds, Europe should create a trust for banks,” Posen said. “National governments should be able to oblige this trust to recapitalise or wind down non-performing banks.”