“Estimates of total expected asset write-downs suggest that the budgetary
costs – actual and contingent – of asset relief could be very large both in
absolute terms and relative to GDP in member states,” the EC document, seen
by The Daily Telegraph, cautioned.


"It is essential that government support through asset relief should not
be on a scale that raises concern about over-indebtedness or financing
problems.”

The secret 17-page paper was discussed by finance ministers, including the
Chancellor Alistair Darling on Tuesday.

National leaders and EU officials share fears that a second bank bail-out in
Europe will raise government borrowing at a time when investors –
particularly those who lend money to European governments – have growing
doubts over the ability of countries such as Spain, Greece, Portugal,
Ireland, Italy and Britain to pay it back.

The Commission figure is significant because of the role EU officials will
play in devising rules to evaluate “toxic” bank assets later this month. New
moves to bail out banks will be discussed at an emergency EU summit at the
end of February. The EU is deeply worried at widening spreads on bonds sold
by different European countries.

In line with the risk, and the weak performance of some EU economies compared
to others, investors are demanding increasingly higher interest to lend to
countries such as Italy instead of Germany. Ministers and officials fear
that the process could lead to vicious spiral that threatens to tear both
the euro and the EU apart.

“Such considerations are particularly important in the current context of
widening budget deficits, rising public debt levels and challenges in
sovereign bond issuance,” the EC paper warned.