While Europe has embarked upon a 750 billion euro ($975 billion) bailout to save its weakest economies and 84 of 91 major banks passed their stress tests, the banks are still in trouble, Bloomberg Markets magazine reports in its October edition.
According to Bloomberg Markets, the sovereign debt crisis is far from over.
The magazine says the Greek financial crisis could still trigger the collapse of larger banks. Bloomberg also notes that in July the European Central Bank pumped in 132 billion euros to prop up 171 banks.
“The stress tests weren’t severe enough,” Julian Chillingworth, who helps manage $21 billion at Rathbone Brothers, told Bloomberg Markets. “Many bond investors aren’t convinced the Greeks are out of the woods.”
If Greece defaults, banks holding its sovereign debt could collapse, Konrad Becker, a financial analyst at Merck Finck, told Bloomberg Markets.
“A default by one EU (European Union) country would lead to an evaporation of trust in banks,” he told Bloomberg Markets. “If investors aren’t willing to invest in banks anymore, then many banks will go bust in months, not years.”
Europe’s major banks are on the hook for more than 134 billion euros in Greek, Portuguese and Spanish government bonds, according to a May survey by Bloomberg.
And it’s not as if worries about government debt woes have disappeared from the bond market. At the end of August, the yield gap between Greek and German bonds was the largest since the peak in May, just before European leaders created the bailout, Bloomberg Markets reports.
As of Sept. 3, 10-year Greek bonds yielded 11.28 percent compared with 2.34 percent on 10-year German bonds.
Despite the stress-test results, European banks have been slow to raise needed capital, Bloomberg Markets reports. They sold about 18 billion euros of debt in August, the smallest amount for the month in six years.
Instead, financial companies are going to central banks for their capital. In July, the European Central Bank loaned 132 billion euros for three months to 171 financial institutions, Bloomberg Markets reports.
In addition to borrowing from the ECB, banks are stashing their cash hoard there. On June 9, euro-zone lenders deposited a record 369 billion euros overnight at the ECB, even more than during the height of the financial crisis in October 2008, Bloomberg Markets reports.
“The amount banks have parked at the ECB is just outrageous,” Florian Esterer, a fund manager at Swisscanto Asset Management, told Bloomberg Markets.
And banks haven’t exactly been clear in acknowledging their predicament.
“European banks haven’t owned up to the large amounts of toxic debt that they hold,” Raghuram Rajan, a finance professor at the University of Chicago, told Bloomberg Markets. He was chief economist at the IMF from 2003 to 2007.
American Enterprise Institute resident fellow Desmond Lachman also sees trouble on the horizon.
“This crisis will likely intensify in the months ahead as markets increasingly focus on the intractable solvency and competitiveness issues confronting countries like Greece, Portugal, Spain, and Ireland,” he wrote in a new report.
“Such intensification will affect Europe's already-troubled banking system, seriously threatening both the European and the global economic recovery.”
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