IMF to Europe: Tackle Bad Loans

Europe currently has approximately 900 billion euros ($956 billion USD) in bad loans, (aka non-performing loans or NPLs). The director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF), Jose Vinals, announced that figure.

Europe currently has approximately 900 billion euros ($956 billion USD) in bad loans, (aka non-performing loans or NPLs). The director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF), Jose Vinals, announced that figure.

According to Vinals, while Europe has made many important strides to improve its overall economy since the “Great Recession” of 2008, authorities need to do more to shore up the banking sector. The Eurozone, in particular, needs attention, and he called for new regulations and other actions to clear up the bad loans and to prevent the possibility of any catastrophic collapse in the future.

In an interview with CNBC, Vinals said, “Important things have been done, such as the increasing of capital of the banks, but there are still about 900 billion euros on NPLs that still need to be decisively tackled.”

Southern Eurozone countries have experienced particularly troublesome NPLs. Affected nations include Italy, Portugal, Spain, and Greece. The European Central Bank conducted an asset quality review of 130 Eurozone banks in October 2014. According to its findings, total NPLs held by the banks it examined came to 879.1 billion euros, and that survey did not include every bank in the region. According to the IMF, these NPLs can inflict a negative impact on the entire economy of a nation and Europe as a whole. Worse, they could hamper Europe’s economic recovery efforts.

According to Vinals, NPLs “capture capital and lower the profitability of the banks so the capacity of the banks to provide credit to the economy is lower. Banks with higher NPLs tend to have less willingness and ability to provide loans but Europe needs banks that lend to the corporate or household sector to support the recovery.” As a result, Vinals urges European banking supervisors and local authorities to take “Decisive action.” This action would take the form of legal reforms designed to restructure the framework of debt in the region.

Vinals went on to note that it was too early to tell if Europe was out of the woods yet on economic recovery. “What we have is a global recovery which is modest and uneven and doing slightly better in advanced economies, including the euro area and European Union, but which is not a vigorous recovery — and emerging markets are losing strength.”