IMF: European Banks Have "Legacy of Unfinished Cleansing"

In a assessment out today the International Monetary Fund describes European banks, which are heavily burdened with debt, as now presenting one of the most significant threats to the global economy. The IMF describes the continent’s banking system as having a both a “legacy of unfinished cleansing,” as well as “pockets of vulnerability, overcapacity, and poor profitability.”

Here’s more from The Washington Post:

“‘Downside risks have risen sharply’ in recent months, the IMF said. ‘The ultimate effect could be substantially lower global demand’ […] the [growth] outlook for Europe was reduced, as the combined impact of government spending cuts, continued concern over national debt and uncertainty about the banking sector undermines an economy already lagging behind the rest of the world. The IMF projected that the 16 countries that share the euro as a currency will grow just 1 percent this year and 1.3 percent in 2011.

“The report and an accompanying analysis of world economic stability emphasized how a problem that was considered limited in scope when it surfaced in Greece last fall eventually expanded to other European countries and is now one of the main issues facing the global economy. Governments across Europe are cutting spending and overhauling social programs in an effort to curb record levels of debt, and the Obama administration is studying similar U.S. measures.

“Although no other country has reached the crisis point hit by Greece — where borrowing costs skyrocketed until a joint European Union-IMF bailout provided emergency funding — the IMF noted that European countries and the United States will be competing this year to refinance some $4 trillion in government bonds maturing in the second half of the year.”

The Post goes on to describe the banks as “relying on an ultimately unhealthy mix of short-term loans from the European Central Bank” to shore up their cash resources, and as unprepared for additional shocks. Further, much of the government debt the GIIPS and other EU nations may not be able to service is held by European banks, meaning that are poorly positioned in the event of a sovereign default.

You can read more details in The Washington Post coverage of how right now it’s Europe that presents the central threat to global recovery.


Rocky Vega,
The Daily Reckoning