Banks must repay state aid to avoid 'time bomb' - Kroes

AMSTERDAM (Reuters) - Rising state debt is a "time bomb" that could bring down banks if governments default on state bonds, Europe's competition commissioner said on Saturday.

The high level of debt taken on by governments, as they pumped billions into ailing banks to keep them solvent during the financial crisis, is "not only a burden for future generations," EU Competition Commissioner Neelie Kroes said.

"It could also be a time bomb," she told the Amsterdam Financial Forum, a conference backed by the Dutch central bank (DNB) and other Dutch organisations.

"Sovereign debt default could not only bring down a government but also a bank or series of debtors," Kroes said. "We need to remove two layers of risk -- the risk of a government default and government risk from a bank collapse."

Dubai spooked financial markets on Wednesday when it said two of its flagship firms wanted to delay repaying billions of dollars in debt.

Speaking at the same forum, Harvard Professor Niall Ferguson said Dubai's debt problems were a clear sign that the crisis was not yet over.

"We should prepare ourselves for years of upheaval. The latest development in the Gulf region illustrates this," Ferguson said.

Kroes said banks, through restructuring and the restoration of healthy competition, should repay governments quickly and remove the risk of government default.

"We need to get banks off state support quickly," she said.