EU president Jose Manuel Barroso said in his first major speech in the European Parliament yesterday that EU have survived the economic crisis. He was either lying or do not have a clue what he’s talking about: According to a report from Standard & Poor’s, European banks have accumulated more than €30 trillion in liabilities that needs to be paid off or refinanced over the next two years.
“Banking sector woes are eroding sovereign credit-worthiness, which is in turn reducing the real and perceived capacity of governments to support weak banks.”
Standard & Poor’s
European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years as authorities withdraw emergency support, according to the report from Standard & Poor’s. The rating agency says banks are at risk of a vicious circle as sovereign debt fears and financial stress feed off each other.
Europe‘s “banking sector woes are eroding sovereign credit-worthiness, which is in turn reducing the real and perceived capacity of governments to support weak banks,” S&P says.
“The collective funding needs of Europe’s banks are vast. The industry is much larger than America‘s or Asia’s. Most of their mortgages and other personal loans stay on their balance sheets and require funding. This contrasts with the US, where financial institutions securitize these loans and which do not require balance sheet funding,” says S&P’s credit strategist, Scott Bugie, according to The UK Telegraph.
The Greatest Vulnerability
According to the S&P report, published in July this year, the European Central Bank‘s emergency lending had inadvertently created a snare. Its three-month loans have had the effect of concentrating roll-over risk for large amounts of debt.
Banks will eventually have to refund these loans in a crowded market, competing with debt-hungry states:
“ECB loans have contributed to a shortening of liability maturities.The result is a growing funding mismatch for the European banking industry. This is happening as regulators prepare to introduce tougher liquidity standards. This is one of the greatest vulnerabilities of the industry.”
The Netherlands has already ended state debt guarantees, forcing its banks to go the market as bonds fall due.
Survival Of The Fittest
Others are following suit. Roughly €1 trillion of such debt in the euro-zone and Britain will come due by 2012.
“The need to refinance the maturing guaranteed-debt looms over many banks,” the rating agency says.
Stronger banks can cope: weaker ones will be left floundering in “a two-tier funding market”.
The EU’s €750 billion “shock and awe” rescue has gained time but not conjured away underlying concerns about the fiscal health of the EU states themselves.
The report came as the ECB’s latest bank survey showed that credit conditions had tightened sharply in the second quarter, with a net 11% of lenders restricting loans.
The survey was carried out in late June, after the €750 billion rescue but before the stress tests for banks.
Risk Of Double-Dip In 2011
“What it shows is that the sovereign debt crisis had a measurable effect on lending,” Silvio Peruzzu at RBS says, adding that rebound will lose steam if the banks are unable to boost lending as companies exhaust their cash buffers and start to borrow again.
“There is a risk of a double-dip in 2011.”
Mr. Peruzzo goes on saying the euro-zone is at a delicate juncture.
Germany has been powering ahead, lifting the much of the euro-zone with it, but the recovery is not yet entrenched. There are signs of a slowdown in the US and Asia that could prove infectious.
The risk is that a renewed growth lapse would put the spotlight back on the austerity policies in Club Med:
“Fiscal consolidation is not a one-off event. They go on for years. If down the line the markets start to question the debt trajectories of these countries, the banking systems will be tested again. There is €1 trillion of private debt in Spain linked to just one asset: property,” he says.
Much depends on whether the global recovery lasts long enough to lift Europe’s weakest states off the reefs, rescuing their banking systems, the UK Telegraph writes.
So, Where Have You Been, Mr. Barroso?
The above stand out in stark contrast to what the EU president, Jose Manuel Barroso, told the members of Parliament in his first major “state of the union” speech yesterday.
“Over the last year, the economic and financial crisis has put our Union before one of its greatest challenges ever … As I look back at how we have reacted, I believe that we have withstood the test. Those who predicted the demise of the European Union were proved wrong,” the EU president said, and repeated EU’s pledge to attack risk-generating financial practices such as big bonuses, credit default swaps and naked short selling.
But as mention above; the problem is caused by the ECB’s lending practice, and the EU politicians eagerness to regulate the financial sector. Not “risk-generating practice”, nor “naked short-selling” or “big bonuses.”
I hereby raise the question: Is Mr. Barroso really competent to be president of the European Union?
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