IMF sees EU banks losing over €400 bln by 2010

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The International Monetary Fund (IMF) has cut its estimate of global banking losses in the last six months but forecast an increase in writedowns in the next year. With European banks expected to lose over €400 billion by 2010, EU finance ministers are expected to discuss the issue today (1 October).

“Actual and potential writedowns from bad assets such as loans and securities have fallen by some $600 billion over the past six months, from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads,” reads the biannual Global Financial Stability Report, published yesterday (30 September) by the IMF.

The encouraging review, based on the IMF’s worst-case estimates in April, has been welcomed by financial operators, although the new data provided by the fund are not only positive.

The IMF calculates indeed that losses of European banks as a results of bad loans and toxic assets will increase in the coming months and could reach a total of almost €420 billion by 2010.

EU banking stress tests

These figures are substantially in line with the analysis carried out in September by the Committee of European Banking Supervisors (CEBS), the top EU banking watchdog, which reckoned a €400 billion loss for European banks by 2010, according to figures leaked by the International Herald Tribune last week.

The results of the EU-wide stress test, conducted by CEBS, will be presented to EU finance ministers during an informal meeting taking place today and tomorrow in the Swedish city of Gothenburg.

“Ministers will consider the option of publishing some figures of the CEBS report,” which concerns 22 top European banks, an EU source told EURACTIV. “But they will not publish in any case any names of the banks involved in the exercise,” the official added.

Evaluating the level of exposure to toxic assets and bad loans is a key element in assessing a bank’s credit-worthiness, but many European states prefer not to publish these data in order to avoid potential negative effects on investors’ confidence. They also argue that there is no globally agreed methodology to calculate banks’ balance sheets.

Transatlantic row

The issue is at the heart of a transatlantic dispute. Washington has in fact opted to name US banks in need of extra capital as a result of their bad exposure during the crisis. The IMF also chose to publish figures on the banking sector.

In its Global Financial Stability Report, the IMF calculated that EU banks are in need of almost €300 billion as a cushion against failure, while the figure for American banks is calculated at less than €90 billion.

European banks are in any case already acting to raise extra capital, many of them thanks to the help of national authorities. But others, especially in Italy and France, are looking for money from the private sector to repay previous debts or to explicitly shield public support.

Financial markets across the globe went into a tailspin following the US sub-prime mortgage crisis in early August 2007, forcing central banks to make massive cash injections to keep the system rolling and fend off a possible liquidity crisis. The situation became critical as the trouble spread across wider financial markets, affecting some of Wall Street's best-rated investments and plunging the US into recession. 

While Europe was initially not too badly affected by the turmoil, the crisis stormed into the continent at the end of September 2008. A number of EU countries were forced to apply emergency measures to salvage their banking institutions and prevent a collapse of the financial system, with the European Commission fast-tracking the approval of bank bailout plans to prevent confidence from plunging further. 

Europe-wide guidelines on how individual countries should salvage troubled banks were hastily agreed to prevent nations from adopting 'beggar thy neighbour' policies. The European Commission also offered guidance on bank recapitalisation and treating impaired assets (EURACTIV 24/07/09).

The Committee of European Banking Supervisors (CEBS) coordinated an EU-wide stress test in September 2009. The exercise is only meant to provide an assessment of the viability of the banking sector as a whole. The banks involved will not to be named unless member states and the banks themselves decide otherwise.

  • 1-2 Oct. 2009: Informal EU Ecofin in Gothenburg. 

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