TELEGRAPH 12.2.09
European banks' toxic debts risk overwhelming EU governments
The toxic debts of European banks risk overwhelming a number of EU
governments and may pose a "systemic" danger to the broader EU
banking system, according a confidential memo prepared by the
European Commission.
By Ambrose Evans-Pritchard and Bruno Waterfield
"Estimates of total expected asset write-downs suggest that the
budgetary costs of asset relief could be very large both in absolute
terms and relative to GDP in member states," said the document,
prepared for a closed-door meeting of EU finance ministers.
"For some member states, it may be the case that asset relief for
banks is no longer an option, due to their existing budgetary
constraints and/or the size of their banks' balance sheet relative to
GDP. The extent of any risks to the EU banking system as a whole from
an inadequate response in these member states needs to be considered,
particularly in the case of cross-border banks".
While no country was mentioned, the obvious candidates are Ireland,
Luxembourg, Belgium, the Netherlands, Austria, Sweden, and Britain --
and non-EU member Switizerland -- which all have oversized banking
sectors. EU banks hold balance sheet assets of ?41.2 trillion (£36.9
trillion).
Brussels refused to comment on the paper, but it is clear that
officials are concerned about default risk in the weaker states where
interest spreads on government bonds are flashing warning signs. The
International Monetary Fund has questioned the lack of a proper
lender of last resort in the eurozone. The European Central Bank is
not allowed to bail out individual states, yet national goverments do
not control the monetary levers.
The IMF says European and British banks have 75pc as much exposure to
US toxic debt as American banks themselves, yet they have been much
slower to take their punishment. Write-downs have been $738bn in the
US: just $294bn in Europe.
Global banks have so far written down half the $2,200bn losses
estimted by the IMF. On top of this, EU banks have $1,600bn of
exposure to Eastern Europe -- increasingly viewed as Europe's
subprime debacle, and EU corporate debts are 95pc of GDP compared to
50pc in the US, a mounting concern as default rates surge.
The EU document also highlighted the "real danger of a subsidy race
between member states" if countries start to undercut each other in
the way they value toxic debts in their `bad bank' rescue programmes.
This could be used as a means of covert state aid, undermining the
unity of the EU single market.
It could also lead to an explosion of budget deficits, already
threatening to hit 12pc of GDP in Ireland next year and almost 10pc
in Spain and Britain.
"It is essential that government support through asset relief should
not be on a scale that raises concern about over-indebtedness or
financing problems. Such considerations are particularly important in
the current context of widening budget deficits, rising public debt
levels and challenges in sovereign bond issuance," it said.
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