–
BERLIN / BRUSSELS (own report). EU officials and think tanks are urgently warning of the transition from the corona crisis to another banking crisis in the Union. So far, the financial industry has come through the corona crisis lightly due to government aid and loose insolvency rules, it is reported, with reference to warnings from the management of the European Central Bank (ECB).
In the coming year, however, there is a threat of a series of bankruptcies and loan defaults, reinforced by the second wave of pandemics. The ECB warns that Europe’s bad loans, which have already reached a volume of more than half a trillion euros, could almost triple if the economy slumped again – to 1.4 trillion euros.
The risks are very unevenly distributed. According to a study by the rating agency S&P, the German financial sector can be considered relatively well equipped, banks in Italy in particular are at great risk. A study published by the Bertelsmann Foundation speaks out in favor of greater involvement of bank customers in any bank liquidations – exception: companies.
Bankruptcies and Loan Defaults
High-ranking officials and think tanks in the EU are urgently warning of the consequences of another banking crisis that could endanger the stability of the European currency area in the coming year. So far, the financial sector in the euro zone has come through the crisis lightly due to government aid, economic stimulus packages and “looser insolvency rules”; but this threatens to change in the coming year, according to media reports with reference to warnings from ECB Vice President Luis de Guindos.
Europe’s banks will have to prepare for a “wave of bankruptcies and loan defaults” as soon as the loan-financed state support measures expire. The second wave of pandemics is already causing the economic outlook to quickly deteriorate after a brief brightening. The ECB is consequently orienting itself, it continues, to a “pessimistic scenario” that expects economic output in the eurozone to collapse by ten percent this year.
This historically unprecedented collapse in GDP in the European currency area was also accompanied by a rapid rise in debt; it will therefore “in any case be followed by a debt crisis”. Worldwide, the state debt burden is increasing “this year from 82 to 97 percent” of economic output, while the mountain of debt in private companies is even swelling “from 89 to 103 percent”.
Imbalances in the EU
For the euro zone, rating agencies are now assuming that the number of loans that will no longer be repaid will double to around 8.5 percent of the total volume of all risky loans. The dramatic economic downturn would thus have a delayed effect on the already unstable financial sector of the EU, which is overloaded with bad loans. According to the ECB, it is said that bad loans with a volume of 503 billion euros are currently in Europe’s bank vaults
This mountain of loans, which are no longer serviced in accordance with the contract, could “almost triple to 1.4 trillion euros” if the “pessimistic scenario” of the economic development occurs. The risk of massive loan defaults including a subsequent financial crisis in the Eurozone is “unevenly distributed”, it said. According to calculations by the rating agency S&P, which rated the creditworthiness of the banking systems on a scale from 1 to 10 in a study, Germany, for example, received the top grade 1. Italy, the third largest economy in the euro zone, received the worst score in the EU with a 6 . The financial sectors of France and the Netherlands are also considered troubled; they received a 3. According to S&P, with a grade of 4 points, Spain is also at considerable risk.
“Not fit for Corona”
A strategy paper by German think tanks dealing with the impending banking crisis now assumes that bank failures cannot be avoided as early as next year. Not every bank will survive the coming “acid test”, especially since the EU is “poorly equipped” for a new banking crisis – this is how the warnings of an analysis by the Bertelsmann Foundation and the Jacques Delors Center at the Berlin Hertie School of Governance are given: The Union am not “fit for Corona”.
The study by the two think tanks confirms that the eurozone has an inadequate institutional and financial framework to cope with the impending bank death. In order for the processing to work, the “current framework must become more credible and reliable,” it says in the paper.
Schäuble’s toxic legacy
According to the study, the coming financial crisis, which will disproportionately affect the south of the euro zone, will no longer be managed with grit. Rather, the rules for bank resolution would have to be applied, which the then Federal Finance Minister Wolfgang Schäuble first enforced against Cyprus in 2013, at the height of the euro crisis, and which he then incorporated into EU law. According to this, private shareholders and creditors should be involved in the losses of a bank failure as part of a so-called bail-in: The bank customers are thus liable for their banks. The national deposit insurance systems are supposed to protect the deposits of bank customers up to an amount of 100,000 euros. So far, these regulations have not been applied in many cases “probably for political reasons”, it is said; but the greater burden on “private creditors” by closing loopholes must be accelerated in the coming crisis.
The background: incomplete deposit insurance destabilizes the affected financial systems in times of crisis, since banks can storm more quickly, from which customers want to withdraw their money en masse. For the EU, however, it is crucial that in the event of a crisis, bail-in regulations lead to capital flight from the endangered banking systems of the southern Eurozone periphery to the northern center of the currency area, which further fuels the interest rate differential between north and south. In the future, “leeway for interpretation”, such as that used in the “lax” liquidation of Italian regional banks, would have to be limited, demands the author of the study published by the Bertelsmann Foundation and the Jacques Delors Center.
Exceptions for entrepreneurs
Exceptions are to be created in order to facilitate the participation of private bank balances in a bank resolution. The study advocates exempting companies and corporations from participating in any imminent bank resolutions. So far, “corporate customers” have been included on an equal footing in the creditors’ participation of a bank that has got into trouble; According to the study, this is “not useful”. Better protection of the deposits of companies and corporations could “reduce the negative consequences of a bank resolution on the real economy”, since these bank balances are “often the necessary funds for the running of a company”. If the industrial capital is better protected, it will also be easier for the responsible government agencies in the crisis countries to carry out a “haircut for the other creditors”, it said.
A case for the ESM
The author of the study also advocates a central role for the EU rescue package ESM in overcoming the coming banking crisis. Since the European resolution fund SRF only has a volume of 42 billion euros and is therefore nowhere near the target of around 70 billion euros, ESM funds would have to be used “in an emergency”. The SRF should actually cover one percent of all customer deposits in banks in the euro zone; Added to this are the national deposit insurance systems, which should cover 0.8 percent of all private customer deposits – but here too, according to the study, the target volumes were not achieved. This means that in the event of a crisis the eurozone does not have sufficient funds to stabilize its financial system.
If one cannot rule out “a violent systemic crisis”, then a “backstop located at the ESM is a pragmatic step”, said the CSU MEP Markus Ferber; however, the project envisaged as part of an ESM reform is still on hold due to some controversial points. The ESM, which was set up in response to the euro crisis, has fallen into disrepute, especially in the southern crisis countries of the euro zone, as its funds are linked to the fiscal pact implemented by Berlin, i.e. to strict austerity requirements such as the introduction of debt brakes.
–
