The European Central Bank warned today that eurozone banks face a "second wave" of up to €195bn (£165bn) in potential loan losses this year and next and that the financial sector is facing "hazardous contagion" from the sovereign debt crisis. The ECB said eurozone banks would need to make provisions for further losses this year of €90bn, and €105bn in 2011, on top of some €238bn in bad debts written off by the end of 2009. "We are experiencing now a second wave of writedowns, which relate to the performance of loans," ECB vice president Lucas Papademos said. "This is not unexpected. Although writedowns on loans will decline, they will continue, simply reflecting the overall performance of the economy. The overall resilience (of the financial sector) has increased, taking into account that capital buffers have been strengthened," he added. "But, at the same time, we are aware of the challenges ahead, particular with respect to public finances." The ECB in its Financial Stability Review also disclosed it had increased its purchases of eurozone government bonds, and has now settled €35bn. European stock markets had remained calm, as the Spanish government promised tough action on labour reform in the wake of last week's downgrade of its credit score. Analysts had feared fresh turmoil when Fitch cut Spain's debt rating by one notch to AA-plus after European markets closed on Friday, hitting Wall Street. The FTSEurofirst 300 index of top European shares closed up 0.3% at 1,000.55 points, albeit bringing the curtain down on its worst month since February 2009. The index lost 5.8% in May amid fears the problems in the eurozone could derail the global economic recovery. The UK and US markets were closed for holiday. The euro gained slightly against the dollar, but analysts warned it would remain under pressure. "I wouldn't draw the conclusion that because the markets didn't react to the downgrade that the pressure isn't to the downside on the euro," said Lutz Karpowitz, currency analyst at Commerzbank in Frankfurt. "We don't have a solution for the debt crisis right now. The pressure on the euro will remain." There were also signs that confidence is waning in Europe. The European Commission's May economic sentiment indicator recorded its sharpest fall since the aftermath of the 2008 financial meltdown. The indicator dipped to 98.4 from 100.6, sending it back below the long-term average of 100 after just one month. Spanish finance minster Elena Salgado promised to push through reform of the country's strict labour laws this month: "The period to reach a pact on the labour market reform is coming to an end and if these talks do not produce the desired results, the government will still begin these reforms ... before the end of June." Spanish unions have threatened to call a general strike over changes to rigid labour laws which economists regard as a barrier to job creation, exacerbating an unemployment rate which has hit 20% and is the highest in the 16-nation eurozone. Zapatero's cause was boosted by praise from Dominique Strauss-Kahn, the International Monetary Fund's managing director, who backed Spain's austerity budget package which just made it through parliament last week – although he made clear more needed to be done. "The measures the (Spanish) government has been taking are strong and should help recover confidence in the future," said Strauss-Kahn. "The issue now is to see how the measures will be implemented, especially those concerning the labour market." Spain's €15bn (£12.7bn) austerity plan made it through parliament by just one vote last Thursday, prompting speculation that Zapatero may be forced to call an early election if his 2011 budget proposal, due in September, is rejected.Eurozone banks face £165bn in toxic loan losses
Wednesday, 2 June 2010
• ECB warns of 'hazardous contagion' from debt crisis
• Spain to push for labour reforms despite union opposition
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