More worries from Europe, especially Germany, about the health of the financial system and the ability of the banking system to continue financing the already subdued level of activity.
The European Central Bank says commercial banks in the 16-nation euro region may lose a further $US283 billion by the end of next year as the financial crisis forces them to write off more bad loans.
“Hard-to-value assets have remained on bank balance sheets and the marked deterioration in the economic outlook has created concerns about the potential for sizeable loan losses,” the ECB said in its June Financial Stability Report.
The central bank said staff estimates suggested the total amount of potential write-downs over the period 2007 to 2010 “could amount to around $649 billion.”
Some $US365 billion have already been reported, meaning up to $US283 million remain to be reported as the economy slumps and loans go bad.
The ECB estimated bank write-downs due to-or toxic assets-would total around $US218 billion from the start of the financial turmoil to the end of 2010, while bad loans would account for another $US431 billion.
The figures were published in the ECB’s latest Financial Stability Review, which concluded that risks to the financial sector had increased in the last six months amidst a deterioration in the economic environment which is putting pressure on the bottom line of companies and households.
"The contraction of economic activity and the diminished growth prospects have resulted in a further erosion of the market values of a broad range of assets," the report said.
London’s Daily Telegraph reported yesterday that the liquidity crunch is increasingly threatening the survival of German companies, as well as finance for new orders.
A survey by German Chamber of Commerce and Industry (DIHK) has found that over a third of all large companies are still seeing credit conditions tighten further, if they can borrow at all. Terms are now tougher than they were at the height of the global crisis over the winter.
That survey was done with 20,000 German companies of all sizes.
"Financial conditions are getting worse for important sectors of the economy," said the report.
It found that borrowing costs had risen for most firms even though the European Central Bank has cut its key interest rate to an historic low of 1%, the Telegraph reported.
Die Spiegel reported that German’s 115 billion euro bailout fund had received 13,000 requests for help, with 5 billion already paid out.
Europe’s industrial output continued to slide in April and was down almost 22% from a year earlier, suggesting that talk of a "V-shaped" rebound is premature. Production fell 23% in Germany and 24% in Italy.
The ECB expects the eurozone economy to contract by 4.6% this year and a further 0.3% in 20110, with recovery not expected until mid year.
On top of this the high value of the euro is making exporting increasingly tougher in the highly recessed international market for manufactured goods.
Not only is the German and eurozone economies under pressure and weak, but the financial system is lagging behind the UK and US in terms of being positioned for recovery.
Over the weekend the G8 finance ministers met to discuss the current state of the global economy and what had to be done.
Typically it ended in real commitment to anything, except to ignore the growing worries about the eurozone financial system.
The International Monetary Fund is worried about the health of the euozone financial system, but the finance ministers from Germany, Italy and France all ignored the concerns at the G8 meeting.
The fear is that Europe could be the straw that crushes the current rebound in markets, if a bank gets into trouble and re-ignites those dark fears from last October-January about collapse.
Some people are getting a bit windy about European banks, especially those in Germany, Austria and Spain where the economies are in worse shape than the national governments admit to.
A gathering crisis in the Baltic economies, where Latvia may have avoided a nasty devaluation, but the continuing weakness in eastern Europe, have made analysts concerned about the health of banks.
A story in the London Telegraph late last week said that European central Bank officials were watching 25 banks in the eurozone, especially if the slump continues into 2010.
"The European Central Bank fears another banking crisis in 2010 if the recession drags on, according to ECB financial stability expert Dejan Krusec in the story in the Daily Telegraph.
If there is a quick ‘V-shaped’ recovery the banks would be strong enough to weather the downturn, he said.
"If this is ‘U-shaped’, the banks will have problems. There are 25 banks we monitor that are strategically important," Krusec was quoted as saying to a Fitch Ratings conference on Eastern Europe.
"The problem is not 2009. Euro-area banks are well enough capitalised to cover losses. The problem is 2010. We are concerned about the length (of the recession)," said Krusec.
Figures last Friday showing a surprisingly larger than expected fall in European output in April have increased the odds of a bigger slump this year and a very sluggish 2010.
The Financial Times quoted a bank analyst at UniCredit (the Italian bank) as saying: "The G8 meeting was characterised by ill-concealed disagreement on the key issues of banks stress testing and of developing concrete strategi
