“Bad Banks” a bomb of € 1.000 billion for European taxpayers
Overshadowed by the sovereign debt crisis and the recession of the real economy, the crisis “subprime” is not a done deal. Detonator European financial bomb, it leaves a bill that banks and European states are not ready to settle. To save big banks, crippled by bad debts and illiquid assets accumulated over the years since 2007, constituted “bad banks.” Balance, six years after the start of the financial crisis: more than 1,000 billion euros in assets remain stored in the defeasance structures in Europe.
Europe’s EUR 500 Billion Ticking NPL Time Bomb
Europe’s non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain’s bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).
As we discussed in detail here, the bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time – the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut non-template may indeed become the key template.
Simply put, the greater the unemployment the more the strain on banks to generate “profits” by any means possible (GGBS?) to cover the capitalization shortfall from NPLs until at some point liability haircuts have to begin…
Non-performing loans as % of total loans across the Euro area