Eurozone banks face further €205bn in losses this year and next, says ECB

BANKS IN the 16-nation eurozone face €205 billion of further losses this year and next as the recession forces them to write off bad loans, the European Central Bank warned yesterday.

The sum comes on top of an estimated €265 billion in writedowns by euro-zone banks since the start of the financial crisis in mid-2007 and shows further pain ahead for the financial sector.

The warning, which helped push the euro down against the dollar, came just hours before Moody’s, the credit rating agency, downgraded 30 Spanish banks and cajas, the unlisted regional savings institutions, citing the worsening quality of their loans and the struggling Spanish economy.

The fates of the eurozone economy and its banks have become increasingly interlinked, the ECB said yesterday in its latest financial stability review report, with bank losses increasingly being caused by bad loans, rather than losses on securities.

Risks to the stability of the financial sector remained high, it said, while “uncertainty prevails” over the banking system’s ability to absorb further shocks.

Its stark comments could fuel calls for European politicians to follow the lead set in the US and “stress test” the continent’s banks to restore confidence.

While some European regulators have initiated some tests, finance ministers faced pressure at a G8 summit in southern Italy at the weekend to do more.

“Both policymakers and market participants will have to be very alert in the period ahead. There is no room for complacency,” ECB vice-president Lucas Papademos told a news conference.

The ECB said the risk of deflation was limited and central bank actions in cutting interest rates and lending banks unlimited funds had helped reduce money market spreads, although these were still elevated for longer maturities.

The Moody’s downgrade in Spain was not a complete surprise because it had put 36 Spanish lenders, half of the nation’s total, on review for possible downgrades less than a month ago. But the move illustrates the severity of the Spanish housing market collapse and the speed with which the crisis has eaten away at the capital base of the country’s banking system. – (Copyright The Financial Times Limited 2009)