Banks in Europe Lag in Recovery
Wednesday, April 22, 2009
European banks are far behind those in the United States in clearing bad loans off their books and may need additional capital injections of up to $1.2 trillion, according to a major International Monetary Fund report released yesterday.
The IMF's global financial stability report -- seen as a key measure of the financial crisis -- suggests that while the downturn may have started in the United States, it could take longer to run its course in Europe and ultimately prove more costly for Europeans to fix.
Overall, the report said, financial institutions and investors worldwide stand to lose $4 trillion from bad debt and toxic assets, their biggest hit since the Great Depression. The single biggest sting is to banks, which are set to absorb about two-thirds of all losses.
The fund also warned of growing credit woes in emerging markets. Addressing that concern, the World Bank said yesterday it would triple its spending to help developing countries withstand the crisis, allocating $12 billion in loans over the next two years for food, health and education programs. The bank spent $4 billion on such social programs in the past two years.
"Most attention in the current crisis has been focused on developed countries where people face the loss of homes, assets and jobs," World Bank president Robert B. Zoellick said. "People in developing countries have much less cushion: no savings, no insurance, no unemployment benefits and often no food."
The IMF sought to quantify the scope of the crisis, saying the weak financial sectors in the United States and Europe are likely to need billions of dollars more in cash injections and signaling that Europe in particular needed to boost its efforts to prop up ailing banks. U.S. banks have written about half the estimated $1.1 trillion in troubled loans and toxic assets off their books, the IMF noted. But European banks have moved much slower, so far writing down less than 25 percent of the $1.4 trillion in bad debts.
Although the financial crisis originated largely with the subprime mortgage bubble in the United States, the global pool of bad assets has been augmented by a surge in troubled loans in Europe stemming from a string of corporate failures and depressed housing and commercial real estate markets. The report raised its estimate of troubled assets originating in the United States to $2.7 billion, up from $2.2 billion in January. For the first time, it also measured the size of troubled loans and assets overseas, placing them at about $1.3 billion.
"Europe may be in as bad shape, if not in worse shape," said Martin Baily, senior fellow at the Washington-based Brookings Institution, and former chairman of the Council of Economic Advisers under former president Bill Clinton. "They are holding quite a lot U.S. troubled assets, but they are also getting defaults themselves as their own economies turn down sharply. In terms of the housing market, with the exception of Germany, their bubble was in many cases bigger than the United States."
The delayed response in Europe, officials note, is tied to the fact that the crisis began in the United States, giving U.S. financial institutions more time to identify and deal with its scope.
The report indicates global lending may not fully recover until 2011. Although lending may have bounced back some in recent months, the credit crunch continues to make it harder and more expensive for businesses worldwide to obtain financing, the report said. The credit crunch has been particularly pronounced and worrisome in the developing world.
In addition, the report notes that taxpayers in many nations are growing weary of bailout efforts when more may be needed for a sustained global recovery.
"The political support for such action is waning as the public is becoming disillusioned by what it perceives as abuses of taxpayer funds in some headline cases," the report said. "There is a real risk that governments will be reluctant to allocate enough resources to solve the problem."
The IMF nevertheless advised governments to "take bolder steps" to reinforce the fragile financial system through bailouts, even if it means nationalization of specific banks. It urged, however, that such steps be temporary and that banks be strengthened and returned to the private sector ownership as soon as possible.
Many nations, including the United States, have poured billions of dollars into financial institutions, though mostly avoiding full nationalization.
In London this month, the group of 20 industrialized and developing nations agreed in principle to combat the financial crisis in part by beefing up resources at the IMF and World Bank by more than $1 trillion -- though they have not yet agreed where all of that money will come from.
That will be one of the chief topics discussed over the next several days during a number of major meetings in Washington. Finance ministers from the Group of Seven industrialized nations, as well as from the larger G20, will meet Friday. The World Bank and IMF will host their annual spring meetings Saturday and Sunday.