Sovereign Debt Woes a Threat to European Banks

Tuesday, 19 Jul 2011 02:57 PM

By Dan Weil

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The European bank stress test results released Friday, July 15, showed that only eight of 90 institutions "failed." But given the widespread exposure of European banks to the continent’s sovereign debt crisis, that assessment may mean little, The New York Times reports.

 

The stress tests gave plenty of information about how much government bonds the banks hold from the troubled economies of Greece, Portugal, Spain and Italy. Those bonds’ prices just keep falling further and further.

 

Banks in Belgium, Greece and Italy are stuck with holdings of bonds issued by their native governments that total 60 percent to 90 percent of the banking system’s capital in those nations.

 

That’s going to make it much tougher for European governments to finance their budget deficits, as the banks will almost certainly become less willing buyers of the governments’ debt.

 

Many experts have urged European authorities to move quickly to force banks to recapitalize, as the United States and United Kingdom did during the financial crisis of 2008-09.

 

The stress tests indicate that European banks don’t have much capital to guard them against losses from their sovereign European debt holdings.

 

So, in effect, the stress tests have simply created more stress.

"The country-by-country exposure (data) is better than any data we've seen before," Alastair Ryan, a banking analyst at UBS, tells The Wall Street Journal.
"It's giving me more things to be fearful of," he adds, referring to plain vanilla loans to non-government borrowers as well.

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