ECB warning on banks rattles global markets

The European Central Bank has given its starkest warning to date on growing strains in the eurozone credit markets.

By Ambrose Evans-Pritchard
Published: 9:11PM BST 15 Jun 2009

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Stark warning: the ECB has given warning of growing strains in the eurozone credit markets Photo: Bloomberg News It said it is expecting fresh bank writedowns to hit $283bn (£173bn) by the end of next year.

"Policy-makers and market participants will have to be especially alert in the period ahead. The credit cycle has not yet reached a trough," said the ECB's Financial Stability Report.

'"The deterioration in the macro-financial environment has continued to test the shock-absorption capacity of the euro-area financial system. Prospects for a significant turnaround in the short term are not promising," it said.

In a ghastly day for Europe's lenders, Moody's downgraded 25 Spanish banks as rising defaults eat into reserves.

"The extra cushion that banks had built up over the years against such risks is becoming increasingly thin. Unless some supportive measures are taken by third parties – by owners, or likely by the government – some banks' capital cushions will soon be affected by asset impairments," it said. Moody's also put UBS on downgrade review.

In Germany, the bank-rescue fund Soffin said deep recession was leading to a "massive sharpening" of bank losses on risk assets, endangering the capital base of the financial sector.

Fears that Europe may set off yet another credit crisis triggered a sharp retreat from "reflation trades" across the globe, with funds scrambling to take profits on equities and commodities after the exuberant bull run since March. US crude dropped $2 a barrel to $70. The Dow industrials dived 200 points on opening, eventually closing down 187 at 8.612, while Frankfurt's DAX fell 3.5pc.

The euro slumped to a three-week low of $1.3772 against the dollar, breaking down through key support levels. The single currency was already under pressure after the BRIC quartet of Brazil, Russia, India and China played down suggestions that their summit today would see an attack on the dollar's reserve status. Instead there appears to be a co-ordinated effort to talk up the dollar.

Hans Redeker, currency chief at BNP Paribas, said Europe's banks missed a chance to rebuild their capital reserves during the credit thaw. "US banks have raised $85bn since the stress tests, while Europe's banks have raised just $7.5bn. This is going to go pear-shaped in coming months as people lose confidence in the whole crisis management of Europe," he said.

The ECB's report said eurozone bank losses would reach $649bn by late 2010: split between $218bn on securities, largely written down already; and $431bn on loans, where the real damage lies. The banks have written down $150bn of loan losses so far.

The report said accounting rules were lax in some countries and there may be "under-reporting". There is a risk that "write-off rates could increase by more than currently anticipated".

Among the dangers is a "downward spiral" as the recession and credit losses feed on each other, further falls in commercial property prices (already down 11pc), and spill-over effects from Eastern Europe.

The report is likely to put pressure on Germany to come clean on its banking debacle by agreeing to public stress tests. France's finance minister, Christine Lagarde, favours transparent tests across the EU, but Berlin seems determined to buy time until after the elections in September.

The ECB advised banks to take advantage of state support quickly to protect themselves from "contagion risks". "There is no room for complacency," it said.

http://www.telegraph.co.uk/finance/news ... rkets.html