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Former IMF chief economist: Many European banks are insolvent

A former chief economist at the International Monetary Fund has issued a tough warning about the financial state of banks in Europe.

Kenneth Rogoff, a Harvard University professor, told Bloomberg that it will be interesting to see how honest financial institutions will have been when the results of stress tests on European banks are published later this month.

"There are a lot of insolvent European banks and the question is whether we'll see them because they give us decent data," he stated.

"They need a lot of restructuring. They're in denial."

European leaders are hoping that the publication of the stress test results later this month will have a comparable effect to a similar move conducted in the US last year.

In America, investor concerns were eased by the results, which showed ten of the weakest banks needed to raise $74.6 billion in capital.

Richard Davis, chief executive officer of US Bancorp, said the move turned out to be a "very brilliant decision" as investors saw the bottom of the market and decided they could start putting money back into the system.

Financial stocks rebounded by 36 per cent in the seven months following the US results.

However, concerns have been raised about whether Europe will be able to repeat the success of the US with its stress test publication.

Dirk Hoffmann-Becking, a senior research analyst at Sanford C Bernstein, said European leaders are caught in a difficult position over the issue.

"There won't be a rebound in European banks unless we have stress tests," he stated.

"But stress tests won't resolve the sovereign debt crisis."

Earlier this month, Jean-Claude Trichet, the president of the European Central Bank, stated that the publication of stress tests - combined with austerity drives from governments across the region - will help to restore the confidence of markets within Europe, reported Reuters.

By Claire Archer