BERLIN — As investors dumped stocks Friday on both sides of the Atlantic, a growing suspicion that Europe’s banks are on shaky ground offered more evidence that the struggling global economic recovery is in trouble.
The increasing mistrust of Europe’s banks is threatening to drag down the continent’s already sluggish economy and prompting new worries for American financial firms that do business with their European counterparts.
Aug. 19 (Bloomberg) -- Frank Engels, co-head of European economics at Barclays Capital, talks about the prospect of joint bond sales by euro-area nations and his proposal for "credit enhanced" bonds. Engels also discusses Spanish plans to lower taxes on new home purchases. He speaks from Frankfurt with Andrea Catherwood on Bloomberg Television's "Last Word."
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The concerns about the health of Europe’s financial firms are making it harder for them to raise money. In turn, they are under pressure to charge more for loans they offer to businesses and consumers on the continent. The resulting credit crunch, though not nearly as severe, has echoes of three years ago when Wall Street’s meltdown prompted fearful banks and businesses in the United States and elsewhere to stop lending each other money, choking off the economy’s lifeblood.
The trouble in the European banking sector comes at a time when policymakers are already struggling to address the continent’s spreading debt crisis and stalling economic growth. New indicators out this week, for instance, showed that growth in Germany, long the region’s economic dynamo, had slowed nearly to a standstill.
Deutsche Bank analyst Matt Spick said that perceived weaknesses in European banks, coupled with the economic slowdown, is creating a “toxic funding crisis” that could leave the financial firms strapped for cash and forced to curb lending.
In European trading, bank stocks continued to drop Friday, after even steeper losses a day earlier. The French bank Societe Generale plunged nearly 16 percent in the past two days while a pair of other French banks, BNP Paribas and Credit Agricole, were down about 11 percent and 9 percent respectively over that period. Germany’s Deutsche Bank lost 7.5 percent in the past two days, and Britain’s RBS was off more than 16 percent.
More broadly, the Stoxx 50, an index of blue-chip companies in the 17-nation euro zone, finished Friday down 2.15 percent. In the United States, the Dow Jones industrial average was off 1.6 percent for the day while the Standard & Poor’s 500, a wider market index, lost 1.5 percent.
As European banks lose trust in each other, the rates they charge each other for loans have been rising. The pace of borrowing by European banks, meanwhile, has slowed.
And U.S. money-market funds, a crucial source of dollars that European banks need to operate, have pulled back from lending them money, pushing up the prices those banks must pay, analysts note. A least one European financial firm recently tapped the last-resort dollar loans offered by the European Central Bank, spooking global investors.
At the heart of the problem are hundreds of billions of dollars in government bonds issued by heavily indebted countries from Ireland to Italy and bought by banks throughout the 17-nation euro currency zone.
At the time of purchase, the banks viewed the bonds as virtually risk-free investments. The banks were not required to set aside any money as a buffer in case of losses on the bonds and considered them easy to use as collateral in raising other funds. But the bonds did not prove to be risk-free — far from it.
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