Bad debts in the eurozone are a “ticking time bomb” for the continent’s economy, with the worst effects expected to be felt next year....
Banks’ balance sheets will contract by a record margin in 2012, further constraining the supply of credit to businesses and consumers, according to Ernst & Young, but the “real impact” of Europe’s debt crisis will not arrive until 2013.Regular readers know that the impetus for banks to shrink their balance sheets is the financial regulators setting a 9% Tier I capital ratio.
In the future, regulators are pushing for the banks to raise their capital ratio further.
Of course, this is nuts given that the banks were never required to recognize the losses on all of their bad debt exposure BEFORE the regulators set about raising capital requirements.
As a result, it is easier for a zombie borrower to get a loan from the banks than it is for a creditworthy borrower.
The accountancy firm said banks will shrink their balance sheets by €1.6 trillion (£1.3 trillion) this year as the result of asset disposals and a contraction in their lending activity – a sharper decline than during the financial crisis....
However, next year looks even more “bleak” as the fallout from bad debts is felt across Europe, Ernst & Young’s Eurozone Financial Services Forecast said.
“Non-performing loans” – a debt that is either in or close to default – in the eurozone will peak at 6.5pc of all outstanding loans next year, a record high for the common currency, according to the accountancy company....
Marie Dixon, an economic adviser to Ernst & Young, added: “Non-performing loans are a ticking time bomb for the eurozone economy.”
She said leniency from lenders to defaulting debtors is “masking the true extent of their non-performing portfolios. As the economy continues to worsen, a larger portion of these loans will be pushed into [default] status, forcing banks to realise their losses and constricting further lending.Please re-read the highlighted text as Ms. Dixon understands that banks are engaging in 'extend and pretend' to keep zombie borrowers alive, but fails to heed the lesson of Japan that says this can go on for decades.