Europe is desperately working to prop up Spain’s wobbling banks, but the European leaders still face a problem that plagues the Continent’s increasingly vulnerable financial institutions; an addiction to borrowed money that provides day-to-day survival financing.
Italy, whose fragile economy is even bigger than Spain’s and whose banks also rely heavily on borrowed money to get by, is in serious trouble as well. In Spain’s case, the flight of foreign money to safer harbors, combined with a portfolio of real estate loans that has deteriorated along with the economy, led to the collapse of the mortgage lender, Bankia. It was their failure that set off the current contagion.
“I think you are lying.”
Europe claims that this latest bailout — worth up to 100 billion euros that will be distributed to Spain’s weakest banks via the government in the form of loans, adding to their long-term debt — can resolve the problem. I think they are either lying or in denial, or both. Heavy emphasis on the lying part.
Investors and analysts worry that highly indebted banks in other weak countries like Italy might face constraints similar to those of Spain in the months ahead.
Last month, the ratings agency Moody’s Investors Service downgraded the credit standing of 26 Italian banks, including two of the country’s largest, UniCredit and Intesa Sanpaolo. Moody’s warned that Italy’s most recent economic slump was creating more failed loans and making it very difficult for banks to replenish their coffers through short-term borrowing.
Because they have yet to experience a colossal real estate bust, Italian banks have long been viewed as healthier than their bailed-out counterparts in Ireland and Spain. And bankers in Italy were quick to argue in recent days that Italian banks should not be compared with those of Spain.
Italy may not have the mortgage exposure that the Spanish banks have, but as economic activity throughout the region came to a near halt, the worry was that bad loans and a possible flight of deposits from Italy would pose a new threat to banks that already were barely getting by on thin cushions of capital. And Italian banks cannot avoid the stigma of the government’s own staggering debt load. Italy’s national debt is 120 percent of its gross domestic product, second only to Greece among euro zone countries.
Also hanging over Europe’s banks are the losses that will hit them when (not if) Greece leaves the euro currency union, throwing most of their euro-denominated loans into a state of default. Banks in France and Germany would be hurt the most, as they have been longstanding lenders to Greece.
For decades, the loans that European banks made to individuals, corporations and their own spendthrift governments far exceeded the deposits they were able to collect — the money that typically serves as a bank’s main source of ready funds. To plug this funding gap, which analysts estimate to be about 1.3 trillion euros, European banks borrowed heavily from foreign banks and money market funds. That is why European banks have an average loan-to-deposit ratio exceeding 110 percent — meaning that on any given day, they owe more money than they have on hand.
This, as you might have guessed, is not a really good thing for a bank.