There has never been a wave of bankruptcies in Europe. The fact that the economy comes through the crisis lightly is due to government aid, economic stimulus packages and looser insolvency rules. The continent’s banks also benefit from this. They have fewer bad loans on their books than would have been expected and are better able to deal with them because, for example, the rules for capital reserves were relaxed during the crisis.
But that will change next year. ECB Vice President Luis de Guindos warned banks again this week to prepare for a wave of bankruptcies and loan defaults. The central bank is now assuming that after the second corona wave, the EU economy will be more oriented towards the previously pessimistic scenario, in which the gross domestic product of the euro zone will fall by around ten percent.
ECB fears mountain of bad loans
That would significantly increase the amount of bad loans in the banking book. There are currently 503 billion euros in loans that the borrowers are unlikely to be able to repay. In the pessimistic scenario, this sum will almost triple to 1.4 trillion euros, warns ECB banking supervisor Andrea Enria.
The risk is unevenly distributed: The rating agency S&P rates it significantly higher in Italy and Spain than in Germany or Sweden. In the annual BICRA report, S&P rates the banking systems of various countries according to their creditworthiness on a scale from 1 to 10, with a higher value indicating a higher risk.
Among the 20 largest banking markets in the world, Italy is currently fifth-worst with a value of 6, after Russia, Brazil, China and India. France, the Netherlands and Spain have deteriorated to values of 3 and 4 respectively, Germany still stands at 1. However, S&P also attests our system a negative outlook. However, the BICRA values should apply for three to five years.
The rating agency has identified four risks that threaten the European banking market in the coming year:
1. The corona crisis is getting worse and / or lasting longer
In current forecasts, S&P assumes that a Covid vaccine will be available by the summer of next year, the number of infections will decrease accordingly and the economy will recover significantly. In this case, the situation of the banks would not worsen compared to the current situation, but the pre-crisis level would not be reached again until 2023 – because the entire economy would not have recovered from the Corona crisis until 2022. But if the pandemic worsens again or vaccines are not available by summer, the risk of bankruptcies increases – and with it the pressure on the banking sector.
2. Governments support the economy too little – or too much
With huge stimulus packages and rescue funds, governments around the world saved the economy from collapse this year. That also helped the banks. More help will be necessary in 2021, depending on how the pandemic develops.
However, this becomes a tightrope act: If the state aid is too low, there is an increased risk of bankruptcy. If the aid is too strong, it weakens the banking business in the long term, because if companies and citizens get too much money from the state, they no longer need bank loans.
3. There is another wave of bankruptcies
The corona crisis will in any case be followed by a debt crisis. S&P expects the debt ratio of states to rise from 82 to 97 percent of global GDP this year. In the case of companies, the jump from 89 to 103 percent should be even more pronounced.
Even after the Corona crisis, these debts could lead to bad loans and corporate bankruptcies. S&P expects that 8.5 percent of risky loans will default in the euro zone – twice as much as before.
4. The real estate market is coming under pressure
In the years before Corona, real estate prices mostly only knew the way up, but that changed during the crisis. In major American cities, rents are falling this year for the first time in a long time.
S&P sees two problems for banks here: Firstly, payment problems for tenants and buyers are simply being postponed due to rent and credit deferrals in many places. However, it is not yet possible to quantify how many payments fail in the end.
Second, the crisis reinforces the trend that retail is increasingly shifting to the Internet. This is a big problem in the USA for the often huge malls, but more and more retail spaces are empty in German inner cities as well. However, homeowners cannot pay off their loan installments with empty spaces.
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