The Banking and Strategy Initiative

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Europe: More Pain on the Way? – BusinessWeek

Europe has had a history of criminal neglect couched in stiff regulation, bodes badly for the Euro

Euro-zone banks could record as much as $398 billion in new writedowns by 2010 (more, but this is the ECB prediction)

As Europe enjoys a long-awaited summer heat wave, a sense of sunny optimism has taken hold of its financial capitals. Many in the regions beleaguered banking community reckon the worst of economic downturn is over. Equities markets have rallied since early 2009, property prices are leveling off, and signs of a recovery in consumer and industrial confidence are starting to surface.But before Europes financial-services industry pats itself too hard on the on the back, bankers and investors may want to heed the sobering analysis released recently by the European Central Bank ECB. Analysts at the ECB, which oversees the 16-country bloc that uses the euro, forecast that euro-zone banks could still record a further €283 billion $398 billion in writedowns by the end of next year, predominantly from defaulting corporate and consumer loans.If that eye-popping figure were to be reached, it would bring the total for European bank writedowns since 2007 to €649 billion $913 billion—about equal to the damage wreaked on the balance sheets of U.S. institutions, including such stalwarts as Morgan Stanley MS and Merrill Lynch BAC. The impact on workers also could be acute: In Britain alone, the Confederation of British Industry, a trade body, figures the countrys financial-services industry could shed an additional 28,000 jobs by the fourth quarter of this year.Most of the problems for Europes banks are linked to struggling economies. Although financial markets have largely recovered, the European Commission still expects the European Unions gross domestic product to contract by 4% this year and a subsequent 0.1% in 2010. The broader downturn has hit consumer spending and led to rising loan-default rates, particularly among small and midsize businesses. The expected jump in defaults also has raised concerns that major banks, such as Germanys Deutsche Bank DB and Spains BBVA BBV, may be undercapitalized and will need to raise more money from investors to cover their exposure.LOWER CONSUMER SPENDING WILL HURT”Banks still have a number of problems on the horizon,” says Pete Hahn, a fellow at City Universitys Cass Business School and a former managing director at Citigroup C. “Debt levels have come down, but [the banks] must come to terms with lower consumer spending and a sharp drop in business activity.”

via European Banks: More Pain on the Way? – BusinessWeek.

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This entry was posted on July 3, 2009 by in Financial Markets, Global, Investments, Uncategorized and tagged , , , , , , , , .

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