Restructuring and Recapitalization Looms Over Eurobanks

Steven Bobson, Europe & Americas Editor
April 13, 2011 /

Restructuring and recapitalization is looming over Euro banks today as the IMF warned that European banks, especially the vulnerable ones, will not escape an upcoming reorganization due to little capital left by the global financial crisis.

European banks are currently in a maelstrom of interlinked debt pressures that are intensifying risks for the system. The situation is posing a large, if not the largest, threat to the present global financial stability.

The IMF explained that heavy debt burdens weigh down economic activity and threaten financial stability by making balance sheets more fragile. When debt is at high levels, its sustainability becomes increasingly sensitive to changes in funding costs and rollover rates.

German banks, as well as Italian, Portuguese and Spanish savings banks are deemed to be the most vulnerable to further shocks.

They need to find fresh capital cushions to stop being a risk to the global financial system.

However, the necessary capital might not be obtained from markets and public sources will most likely be tapped for funding.

According to a Washington-based fund, financial institutions could build capital by reducing dividend pay-out ratios, by retaining a greater proportion of earnings and by gradually downsizing balance sheets.

On the other hand, government debt is on a worryingly upward path in many advanced economies today and global banks are bound to face $3.6 trillion of maturing debt over the next two years.

US and Japan, who were practicing dangerous debt dynamics, and banks exposed to troubled sovereign debt, who were exposed to additional funding constraints, were warned by the IMF to be wary with their actions.

 

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