European Defaults Rise to 8.8% of Euro GDP
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Non-performing originations in the top 130 European banks have reached 8.8% of the Eurozone’s total GDP, in a sign that high debt loads, bankruptcies, deflation, and stagnant unemployment is making it impossible for Europeans to pay their debts.
European equities saw broad declines in Monday trading as the European Central Bank saw over two dozen failed Eurozone banks amidst the debut of its small bond-buying program.
Non-performing originations in the top 130 European banks have reached 8.8% of the Eurozone’s total GDP, in a sign that high debt loads, bankruptcies, deflation, and stagnant unemployment is making it impossible for Europeans to pay their debts.
European equities saw broad declines in Monday trading as the European Central Bank saw over two dozen failed Eurozone banks amidst the debut of its small bond-buying program.
A total of 25 of the 130 largest European banks have capital shortfalls of 25 billion euros, according to the ECB’s in-depth review of banks. The report also saw a need for banks’ asset values to rise by 48 billion euros, while the banks’ combined exposure to non-performing loans added an additional 136 billion euro shortfall to the banks.
In its study, the ECB concluded that banks are at risk of losing 263 billion euros of Tier 1 capital. The ECB also discovered a total of 879 billion euros of non-performing assets throughout the 130 euro banks. Non-performing refers to any debt or obligation that is overdue by 90 days or more.
The threat of more defaults could cause higher unemployment, bank failures, and more recessions throughout the Eurozone. Despite the substantial risks of Europe’s banking sector, ECB Supervisory Board Chair Danièle Nouy was upbeat. “This exercise is an excellent start in the right direction. It required extraordinary efforts and substantial resources by all parties involved, including the euro area countries’ national authorities and the ECB. It bolstered transparency in the banking sector and exposed the areas in the banks and the system that need improvement,”
The ECB made no further comment on the cost of the stress test or how it was funded. Similarly, the ECB did not state what measures would be taken to shore up the $1.2 trillion in defaults that are piling up throughout the European banking system. The ECB did reference measures taken in 2013 to reduce “the insufficiencies detected by the comprehensive assessment” as well as more recent steps to “count toward the coverage of the capital shortfall.”
Small Covered Bond Purchases
The ECB’s most recent measure is an attempt to buy covered bonds in open European markets, and the ECB began with a purchase of 1.7 billion euros of covered bonds last week. That purchase represents 0.0019% of the total amount of non-performing debts in the Eurozone.
However, the ECB has made it clear that it will focus on purchasing the highest quality assets. Germany has opposed the purchase of sovereign bonds, meaning that the ECB has focused on covered bonds and asset-backed securities in its intervention programs. Bundesbank President Jens Weidmann has warned that bond-buying programs will force the ECB to overpay for asset-backed securities. Historically, the Bundesbank has argued for austerity and contracting government spending to spur growth.
Greece saw its sixth straight year of negative growth in 2013, at -3.9% GDP growth in 2013, while Italy saw its second straight year of GDP contraction, at -1.9% growth. Cyprus contracted by 5.9% while Netherlands, Portugal, Slovenia, and Finland also saw their economies shrink.
More recently, France’s economy stagnated in the second and third quarters of 2014 while Germany saw growth begin to contract in the third quarter of this year.
