EUROPE’S BAILOUTS RISK A FULL-BLOWN FINANCIAL CRISIS
The measures implemented by governments in the eurozone have one common denominator: a massive increase in debt from governments and the private sector.
Loans lead the stimulus packages from Germany to Spain. The objective is to give firms and families some leverage to pass the bad months of COVID lockdowns and allow the economy to recover strongly in the third and fourth quarters. This bet on a speedy recovery may put the troubled European banking sector in a difficult situation.
Banks in Europe are in much better shape than they were in 2008, but that does not mean they are strong and ready to take billions of higher-risk loans. European banks have reduced their nonperforming loans, but the figure is still large at 3.3 percent of total assets according to the European Central Bank. Financial entities also face the next two years with poor net income margins due to negative rates and a very weak return on equity.
The two most important measures that governments have used in this crisis are large loans to businesses partially guaranteed by the member states and significant jobless subsidy schemes to reduce the burden of unemployment.
Almost 40 million workers in the large European nations are under a subsidized jobless scheme according to Eurostat and Bankia Research. Loans that add up to 6 percent of the eurozone’s GDP have been granted to allow businesses to navigate the crisis. So, what happens if the recovery is weak and uneven and the third and fourth quarter growth figures disappoint, as I believe will happen? First, the rise in nonperforming loans may elevate the total figure to 6 percent of total assets in the banking sector, or €1.2 trillion. Second, up to 20 percent of the subsidized unemployed workers will probably join full unemployment, which may increase the risk in mortgage and personal loans significantly.
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