Europe’s banks facing second wave of debt stress
April 24, 2009...1:21 pm
By Calvin Palmer
Swiss financial analysts are forecasting a “second wave” of debt stress to hit the United Kingdom and Europe this year.
Risk advisers Independent Credit View said a detailed “stress test” of 17 lenders worldwide found that European banks have much lower reserve cushions than U.S. banks, leaving them acutely vulnerable to the coming phase of rising defaults in bank loans.
“The biggest risk is in Europe,” said Peter Jeggli, Credit View’s founder.
Deutsche Bank has reserves to cover a default rate of 0.7 percent, against non-performing assets (NPAs) of 1.67 percent; Britain’s Royal Bank of Scotland has 1.23 percent against NPAs of 2.43 percent, and France’s Crédit Agricole has 2.63 percent against NPAs 3.64 percent. None have put aside enough money.
By contrast in the U.S., Citigroup has reserves of 4 percent against NPAs of 3.22 percent; and JP Morgan has 3.11 percent against NPAs of 1.95 percent.
Jeggli said: “The Americans are ahead of the curve. European banks are exposed to US commercial real estate and to problems in Eastern Europe and Spain, where the situation is turning dramatic. We think the Spanish savings banks are basically bust and will need a government bail-out.”
The IMF said European banks have so far written down $154 billion (£105 billion) of bad debts, or just 17 percent of likely losses of $900 billion (£613 billion) by 2010. U.S. banks have written down $510 billion, 48 percent of the expected damage.
Analysts say America’s quicker response has given the impression that U.S. banks are in worse shape, but this is a matter of timing and “transparency illusion”. Europe risks repeating Japan’s errors of the 1990s, when its banks concealed losses and delayed a recovery.
Europe’s banks are exposed to heavy losses from U.S. property, face collapsing credit booms in their own backyard and fallout from high levels of corporate debt in the eurozone.
Mr Jeggli said the financial crisis was “front-loaded” in the Anglo-Saxon countries and Switzerland because their banks invested heavily in credit securities, which suffered a cliff-edge fall when trouble began, forcing harsh write-downs under mark-to-market rules.
With Europe’s traditional bank loans it takes longer for the damage to surface and the intensity of Europe’s recession would suggest losses will be huge.
Do bear in mind that Ambrose Evans-Pritchard wrote the original article and he takes great delight in predicting a financial apocalypse, especially regarding the demise of the euro.
[Based on a report by The Daily Telegraph.]
