The fragility of Europe’s banks has been highlighted by the implosion of Franco-Belgian lender Dexia.
It has had to be rescued by the French and Belgian governments because it holds too many toxic — as in potentially worthless — assets, including euro zone government bonds.
Many other European banks face the same problem.
The European Central Bank has just stepped up its so-called “liquidity “support for the region’s lenders.
The value of their holdings of government debt from Greece and other euro zone periphery states is falling in value.
The International Monetary Fund says European banks need 200 billion euros in additional funds to build up their capital – that is their financial cushions against bad loans.
Other European banks expect to be ordered to raise more capital under the Franco-German effort to draw a line under the debt crisis – France’s banks are seen as among the most in need of capital.
Dexia is the first leading European banking group to succumb to the euro zone sovereign debt crisis; but will there be others? We put that question to economist Marc Touati.
euronews: “Mr Touati, can we expect other banks to face the same fate?”
“We’re not there yet, so we must not over dramatise, don’t forget that the situation with Dexia is three years old: it should have been broken up three years ago, but for political reasons that wasn’t done. So now it can’t be avoided since its risk-taking was excessive, especially on sovereign debt.
“So there are two situations: either you save the euro area, so there will be no domino effect for French or European banks, or you let a country like Greece default and not repay a portion of its sovereign debt, then there is a risk of a domino effect and in that case the French and European banking sector is in danger.
euronews: “Currently, money is not being lent for fear of it not being paid back, does that put the banking system in danger of imploding?”
“The real danger right now is that we have a kind of vicious circle, with the suspicion that the banks and politicians unfortunately are powerless to stop it. Political leaders can’t say we are going to save or we’re not going to save Greece or we’re not going to save the euro area, and therefore this uncertainty leads to tensions within banks, and speculation about who is next on the list.
“But let’s not overstate the case, banks’ balance sheets are nowhere near as bad as they were in 2008, the risk is much less than in 2008, and the danger is that the banks are not taking risks with loans, so it is stifling the financing of the economy.”
euronews: “After months of denial, the Germans and French have done something this past weekend about recapitalising European banks. Is this good news at last?
“We’ve been expected something concrete for months already, there’ve been lots of announcements but no real decisions. That’s what is dangerous, both for banks, but also for the euro area economy because today we’re on the brink of recession, the recession could return in the next few months, and if the banks aren’t lending, then this time the recession will be worse, becoming more and more serious. With a recession there’s deficits, which means more public debt, and a devastating cycle of debt, not just for Greece but for the entire euro area, that’s the danger right now that our leaders are not taking the bull by the horns.”
euronews: “Could this spread to the real economy? In other words, should investors in Europe worry about their savings?”
“No, I really don’t think we’re at that point, there is no risk to peoples’ savings in European banks. Of course, if tomorrow the euro zone were to blow apart, there will be difficulties, but fortunately that hasn’t happened and hopefully we will avoid this nightmare scenario. So the risk to peoples’ savings is limited. By contrast there is a risk to growth, the banks are already very cautious, hardly lending at all – that hits share prices, which means the banks will be even less likely to lend, so if there is less credit being extended, there is less growth, fewer jobs, more unemployment, therefore, bigger deficits, so that’s the real danger right now.”