Banks in the EU area have Euro 360 billion of bad debts, according to recent figures. The European Central Bank is telling the worst banks to write off more of their losses on difficult loans, and to raise more capital from shareholders or retained profits to improve their balance sheets.
Euro area bank shares have generally been badly hit this year, with renewed worries about their bad loans and capital needs. Their regulator, The European Central Bank, along with its master, the EU, are looking for private sector solutions. Under recently agreed EU rules there should be no state capital or subsidy going into these banks. Where there are large losses, they have to be met out of shareholder funds and through the bail in of bondholders. People and institutions who have lent banks money may find their bond is converted into shares, or they may have to take a cut in the terms on which the money was advanced.
The Italian banking system is the current eye of the storm. Markets are worried about Monti dei Paschi di Siena, which is in the process of cutting its bad debts. The Italian state has encouraged the establishment of the Atlante fund which bought Popolare di Vicenza. There is discussion of a further Euro3-5 billion bank assistance fund. The EU has discouraged the Italian government idea of state aid as a temporary measure, but has allowed the provision of liquidity assistance.
There are problems with banks in Portugal and Spain as well. The Eurozone’s hatred of subsidies and reluctance to share the surpluses from the northern rich countries with the deficit countries of the south and west remain major problems in the way of successful economic and social outcomes.
The weakness of the Euro commercial banking system, the lack if transfer payments fromrich areas to poor, and the rigour of the bank assistance regime are all reasons why the Eurozone will continue to struggle.