Banks in Debt?

Most of this “debt” is part of the purchase and investment on toxic financial products the banks themselves created as well as unpaid real estate mortgages

Reuters
April 14, 2011

The world’s banks face a $3.6 trillion “wall of maturing debt” in the next two years and must compete with debt-laden governments to secure financing, the IMF warned on Wednesday.

Many European banks need bigger capital cushions to restore market confidence and assure they can borrow, and some weak players will need to be closed, the International Monetary Fund said in its Global Financial Stability Report.

After creating toxic financial products, loan schemes and other scams, banks requested to be bailed-out with taxpayer money.

 

The debt rollover requirements are most acute for Irish and German banks, with as much as half of their outstanding debt coming due over the next two years, the fund said.

“These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources,” the IMF said.

Overall, the IMF said global financial stability has improved over the past six months.

The most pressing challenges in the coming months will be funding of banks and sovereigns, particularly in vulnerable euro area countries, it said.

The IMF and European Union bailed out Greece and Ireland, and are in talks with Portugal on a lending program as sovereign borrowing costs surge.

Many investors have questioned whether Spain can avoid a similar fate, but the IMF said Spanish authorities were taking the right steps to address the country’s debt problems.

“The actions that have been taken in Spain recently have managed to decouple, in the views of markets, the fortunes of Spain relative to those of Portugal” and Ireland, said Jose Vinals, director of the IMF’s Monetary and Capital Markets Department.

European banks hold large amounts of euro zone sovereign debt, making them vulnerable to losses if countries are forced to restructure.

Vinals said lending programs in Greece and Ireland were built on the assumption there would be no such restructuring, and the programs needed time to work.

Still, worries about bad debt exposure have heightened investor concerns about bank balance sheets, making it even more important for firms to shore up their capital.

US banks built up capital buffers in 2009, when regulators completed a set of stress tests that revealed some large holes.

But European banks still need to raise a “significant amount of capital” to regain access to funding markets, the fund said.

“It is … imperative that weak banks raise capital to avoid a pernicious cycle of deleveraging, weak credit growth, and falling asset prices,” it warned.

Living Dangerously

The European Central Bank’s upcoming stress tests provide a “golden opportunity” to improve bank balance sheet transparency and reduce market uncertainty about the quality of assets on banks’ books, the IMF said.

European banks won’t be able to obtain all the necessary capital from markets, and public money may have to fill some of the gaps, it added.

Banks could also cut dividends and retain a larger portion of earnings.

“Overall, a comprehensive set of policies — including capital-raising, restructuring and where necessary resolution of weak banks, and increased transparency about banking risks — is needed to solve banking system vulnerabilities,” it said.

“Without these reforms, downside risks will re-emerge.” The IMF said banks’ exposure to troubled sovereign debt is “uncertain,” which adds to the funding strains.

It said government debt was generally high and on a worrying upward path in many advanced economies.

It repeated its warning that the United States and Japan faced particularly dangerous debt dynamics.

Advanced economies were “living dangerously” with high debt burdens, and faced the difficult task of trying to pare deficits without choking off the economic recovery.

The fund said government interest bills would likely rise, although the burden should generally remain manageable provided countries proceed with deficit reduction plans.

For 2011, Japan and the United States face the largest public debt rollovers of any advanced economy at 56 percent and 29 percent of gross domestic product, respectively.

“While the United States and Japan continue to benefit from low current (borrowing) rates, both are very sensitive to a potential rise in funding costs,” it said.

Greece explodes in protest to IMF, World Bank, assault

Yahoo News

A renewed selling frenzy gripped euro zone financial markets on Tuesday as concern mounted that a record EU/IMF bailout forgreek protestGreece would not stop a debt crisis spreading in the single currency area.

Spanish Prime Minister Jose Luis Rodriguez Zapatero dismissed as “complete madness” a market rumor that his country would soon ask for 280 billion euros in aid from the euro area.

The euro sank to a one-year low of beneath $1.31 and the risk premium on Greek, Portuguese and Spanish bonds soared amid jitters about a possible Greek debt restructuring and worries over the fiscal health of other southern European countries.

In Athens, striking public workers challenged Greece’s 110 billion euro ($146.5 billion) bailout-for-austerity deal, starting a 48-hour national strike that shut down ministries, tax offices, schools, hospitals and public services.

“There is no faith in what the EU and the IMF have proposed for Greece,” said Dean Popplewell, chief currency strategist at OANDA, a foreign exchange brokerage in Toronto.

“Capital markets are betting on a Greek default, as Greece’s own populace is not going to accept the terms of this rescue, and contagion is a real concern hurting the euro,” he said.

News that Greece has appointed debt restructuring specialists Lazard to provide “general financial advice” fueled speculation that some form of orderly rescheduling or payment moratorium may be likely, despite vehement official denials.

Finance Minister George Papaconstantinou told Reuters after news of the Lazard hire: “Any form of debt restructuring is out of the question.”

Lazard recently advised countries like Argentina, Ecuador and Ivory Coast on sovereign debt restructurings.

“NOT FULLY DOUSED”

The main Greek public sector union, ADEDY, rallied thousands of protesters outside parliament to reject planned wage and pension cuts and demand that the rich foot the bill. Police fired teargas at a small group of protesters who threw rocks and bottles.

“We want an end to the freefall of our living standards,” said Spyros Papaspyros, the head of ADEDY, which represents about half a million workers in the Aegean nation of 11 million.

The cost of insuring Portuguese, Spanish and Irish debt against default jumped as contagion worries spread, Markit data showed. Investors sought a safe haven in U.S. Treasury bonds.

Greek bond yield spreads over benchmark German Bunds spiked above 600 basis points for the first time since Sunday’s euro zone rescue deal, and Greek bank shares plunged by 10 percent on the worsening economic outlook.

Jitters about whether the emergency loan package would be enough to stem the euro zone’s sovereign debt crisis also hammered Spanish stocks.

“This would suggest that contagion fears have not been fully doused, with the Greece rescue terms not allaying fears of states facing similar challenges,” Nomura rate strategist Sean Maloney said.

Worries that the aid package may be insufficient to meet Greece’s borrowing needs contributed to market concerns.

Economists at several European financial firms calculated those needs to the end of 2012 at 120 billion euros, based on latest IMF and Greek government figures. Germany’s Bild daily cited a government estimate of 150 billion euros given to the parliamentary finance committee.

European Commission officials said they expected Athens to be able to return to markets for funding in the second half of 2011 once it had won back credibility by implementing tough reforms.

But that remains a big “if,” given the grim economic outlook and the scale of public opposition.

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