Sat, Oct
27, 2012 at 11:30
The
immeasurable risk European banks may be hiding
There is growing concern among policymakers and analysts
that the true extent of European banks' debt problems is being masked. There is growing concern among policymakers and analysts that the true
extent of European banks' debt problems is being masked.
Sir Mervyn King, Governor of the Bank of England,
became the most high-profile policymaker to date to warn of the dangers of
banks putting off foreclosures in a speech Tuesday night.
His stern warning to UK banks that they need to drop the
"pretense" that some of their bad debts will be repaid was coupled
with the statement that they have "insufficient capital" to deal with
losses which have remained undeclared.
Essentially, what seems to have happened is that
banks across the euro zone have put off foreclosures on weak businesses - a
process known as forbearance. This has been enabled by low interest rates
across the region and rescue packages which have injected unprecedented amounts
of liquidity into the banking system and helped keep struggling economies
afloat.
The scale of forbearance is hinted at in relatively
low rates of company insolvencies.
In the UK, despite the recession,
insolvency rates are similar to 2002, when the economy grew by 1.6 percent,
according to government figures.
Greece's problems have been well flagged - yet just five
Greek companies were declared insolvent in 2011, the year it was forced to seek
a bailout from international lenders, fewer than in 2007, when its economy was
still growing.
This
persists across the euro zone, with the weakest economies sometimes
experiencing its lowest insolvency rates.
In
2011, the number of insolvencies per 10,000 companies was lowest in Greece, Spain,
Italy and Portugal,
according to calculations from Creditreform.
However, as Nigel Myer, director of credit strategy
at Lloyds, pointed out, the extent of this is "effectively invisible"
and "almost impossible to quantify." Decisions are made by individual
banks and they do not have to declare them under accountancy rules.
Putting off foreclosure could be dangerous not only
because it masks the true state of businesses, but because it could mean a
faster rate of insolvencies if banks decide to change their policies in
response to a worsening economy, with potential damage to employment figures
and the broader economy - and to the banks themselves.
"To the extent that forbearance has taken
place, a worsening economic environment in these countries could lead to a
faster rate of deterioration in asset quality than might be inferred from
reported numbers," Myer warned.
Of course, delaying the repayment of non-performing
loans can be positive for the economy, particularly in the short-term.
"It has allowed companies to survive and
people to be employed," as Myer pointed out. "It also very likely
supports tax receipts and reduces the need for social security support."
Sir Mervyn's warning does not chime with other
influential figures in the UK.
Andrew Bailey, a member of the Bank's Financial
Policy Committee and head of prudential regulation at UK regulator
the Financial Services Authority, thanked the banks for their actions earlier
in October.
The European countries least likely to be affected
by forbearance following worse-than-expected economic data are Switzerland, Austria
and Denmark,
according to Myer, who suggested spreads in Swiss banks and the recent rally in
Danish spreads should be supported by worries about forbearance.
Written by Catherine Boyle, CNBC. Twitter: @cboylecnbc.
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