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Old Jun 17th 2009, 03:26 PM
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Michael Michael is offline
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Default Euro Area Banking Crisis

Too much of our discussions here seem to focus upon the US banking crisis.

It seems that the European banking crisis is apparently worse.

he Euro Area has performed remarably badly in this downturn. This is partly due to the ECB, whose policy stance has been less expansionary than that of the Fed and the Bank of England. Its official policy rate still stands at 1.00 percent, around 100 basis points above the level it should be at, and the Eurosystem has expanded its balance sheet less than the Fed and the Bank of England. A more serious problem is that addressing the solvency of the banking system in the Euro Area has not yet begun in earnest. There have been government capital injections (or announcements of such) when banks were about to fall over (Commerzbank and assorted Landesbanken in Germany, ABN-Amro and ING in the Netherlands, and many other banks in Belgium, Ireland, France, Italy and now Spain), but it has been even less systematic and on a smaller scale than in the US.

In addition, the Euro Area banks have managed to keep the problem assets they have on their balance sheets under wrap. No stress tests whose methodology and/or outcomes are in the public domain have been performed. The European Commission now wants a uniform set of EU-wide stress tests, but only to give it and supervisors/regulators a sense of what the risk-map is, not as a prelude to mandatory capital raising and/or a restructuring of funding strategies.

The Euro Area banks have used every accounting trick in the book to avoid revealing the existence of troubled or toxic assets and marking them to market. The ECB recently estimated the additional capital required by the Euro Area bans at between 212 and 283 bn. People close to the industry assure me that the true figure is at least twice that amount. So Euro Area banks are likely to be or become zombie banks to a much greater degree than their US and UK counterparts. They have revealed little, recognised less and are, to an unknown degree, still subject to material insolvency risk because of undeclared horrors on their balance sheets. Their high degree of leverage also makes them extremely vulnerable to further balance sheet deterioration as conventional household, industrial and commercial loans go belly-up in increasing numbers as the recessions deepens and lengthens.

This doesn't draw a very pretty picture at all. As a matter of fact, this is very ugly. I admit that I've not been following the Eurobank situation at all and am surprised to hear that is so much worse than the US/UK situation.

Any thoughts on this issue? I think it is still too early to judge the 'stimulus' issue as there are too many variables involved in economics sweeping conclusions based on very little data over too short a term of analysis.
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Old Jun 18th 2009, 12:29 AM
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Greendruid Greendruid is offline
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Default Re: Euro Area Banking Crisis

Yikes! Yeah, this sounds bad. I can't imagine that the EU countries have any real criticisms for the way things have been/are being done in the US. Is there perhaps a trust in the very old money that exists in Europe providing some sort of cushion? I can't think of a more dangerous way to plunge a place back into feudalism.
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