Saturday 21 October 2017

Eurozone braces for €195bn second wave of bad loans

Austrian National Bank Governor Ewald Nowotny (left) talks with European Central Bank (ECB) President Jean-Claude Trichet before a
conference hosted by Austrian National Bank in Vienna yesterday
Austrian National Bank Governor Ewald Nowotny (left) talks with European Central Bank (ECB) President Jean-Claude Trichet before a conference hosted by Austrian National Bank in Vienna yesterday

Patrick Hosking and Martin Waller

THE European Central Bank (ECB) sent tremors through financial markets last night when it warned that banks in the eurozone nations faced having to write off another €195bn in bad loans over the next 18 months.

In what it predicted would be "a second wave" of loan losses, the ECB forecast a fresh flood of red ink for eurozone banks that have already written off €238bn since the banking crisis erupted. The warnings are likely to exacerbate suspicions in London that while British and American-based banks have grasped the nettle and written off the bulk of their sour loans, continental banks have been slower to do so.

The ECB said that eurozone banks were facing a "hazardous contagion" from the government debt crisis. Banks hold hundreds of billions of euros-worth of bonds issued by eurozone member nations. Some of these have plunged in value amid growing doubts about the creditworthiness not only of Greece but also of Portugal and Spain, which was stripped of its AAA credit rating on Friday.

The warnings were contained in the ECB's latest Financial Stability Report, in which it predicted that eurozone banks would make loan losses of €90bn this year and another €105bn in 2011.

The ECB emphasised that most banks in the eurozone were now more resilient than in the past thanks to replenished capital levels, but they faced new sources of risk and questions over the sustainability of their profits.

The ECB also revealed that it had increased its purchases of eurozone government bonds, a measure introduced on May 3 at the height of concerns over Greece. It said it had settled €35bn in bond purchases by May 28, up from €26.5bn a week earlier.

Fragility

In further evidence of the fragility in financial markets, the central bank also said it might delay the phasing out of cheap lending operations designed to help banks through the financial crisis. These were introduced when Lehman Brothers collapsed in September 2008.

The Spanish rescue last weekend of the provincial savings bank CajaSur reignited concerns about the strength of some continental banks. Over the weekend Caja Madrid, the country's second-biggest savings bank, was revealed to be in emergency merger talks with five regional lenders.

Lucas Papademos, the European Central Bank vice-president, put a confident face on prospects, saying that he still expected eurozone economic growth to pick up speed in spite of the raft of fiscal tightening measures unveiled by European governments.

Spain's government warned unions yesterday that it would take unilateral action on labour market reforms as the final deadline for the resolution of months of negotiations with unions and business leaders passed without agreement. It said that reforms would be imposed before the end of June.

Talks on thrashing out a deal were halted after the Labour Ministry said it would extend the deadline for agreement by a week, but Finance Minister Elena Salgado made it clear that the government would press ahead with the reforms regardless of the outcome of the discussions.

Prime Minister Jose Luis Rodriguez Zapatero is desperate to reassure markets by amending laws that are seen as hampering economic recovery. Spain is still reeling from last Friday's decision by Fitch Ratings to downgrade the country's sovereign debt from its AAA level, but a much-feared run on the euro failed to emerge in the first day of trading after the decision. (©The Times, London)

Irish Independent

Also in Business