Tokyo conference told government action is needed over eurozone crisis

“The biggest thing you need is forcefully injecting enough capital into the banking system,” Mr Posen said at a Tokyo conference on global financial regulation hosted by the Columbia Business School.

“The source of current problems is not Greece... The source of current problems in the euro zone is that various financial exposures we all have in the interbank market are not yet resolved because certain financial institutions are insufficiently capitalised, insufficiently disciplined,” he said.

The failure in Athens to form a government has stoked fears of a disorderly Greek exit from the common currency that could trigger meltdown of the global banking system.

Investors are expected to stay wary at least until the June 17 Greek election makes clear whether the nation will stay or leave the euro.

Mr Posen said that a series of central bank actions taken around the world to contain the crisis, including the European Central Bank’s three-year funding, have prevented things from getting worse. But monetary policy alone would not solve structural problems such as those of the banking system.

“Good monetary policy will not solve structural problems, bad monetary policy will make all structural problems insoluble... Institutions require very active government intervention,” he said.

While Japan made headway in cleaning up its banking system after a crisis in the 1990s and the United States and Britain have partially resolved recent woes, “it is a path far from under way in the euro area,” he said, adding that countries need not be afraid to nationalise banks.

Last week, European Union ministers agreed on tougher capital rules for banks, resolving years of sparring between Britain and the rest of the EU over how to prevent another financial crisis.

Britain has been urging its banks to make contingency plans for at least six months, and the Bank has said that irrespective of whether there was a euro zone break-up, the way ahead would be painful for Britain as well as the rest of the EU.