BANKS IN the euro zone could lose up to €195 billion in “second wave” loan losses over the next 18 months, the European Central Bank (ECB) has warned.
The ECB said euro zone banks would need to make provisions for further losses this year of €90 billion, and €105 billion in 2011, on top of some €238 billion in bad debts written off by the end of 2009. The ECB also disclosed that it has increased purchases of euro zone government bonds. The euro recouped some of its losses yesterday but remained under pressure after a cut in Spain’s credit rating late on Friday.
Total writedowns from bad loans and securities between 2007 and the end of 2010 were likely to be lower than previously expected, the ECB said in its latest Financial Stability Report. However, writedowns this year and next year would be larger if heightened sovereign debt risk and the impact of government spending cuts dragged down economic growth.
The ECB began buying up mostly Greek, Portuguese and Spanish bonds on May 3rd in a contentious move to calm debt markets and support a €650 billion stabilisation package for the euro agreed by the European Union and the International Monetary Fund (IMF).
The central bank said in a statement it had settled €35 billion in bond purchases by May 28th, up from €26.5 billion a week earlier.
ECB governing council member Axel Weber, president of Germany’s Bundesbank, urged a tight cap on the bond buying programme and said the extraordinary steps taken to ease the euro zone debt crisis posed a risk to price stability.
ECB president Jean-Claude Trichet said the euro zone economy may expand more than expected in the second quarter.
French president Nicolas Sarkozy is pressing his European partners to set up a group of euro zone leaders with a secretariat to act as an economic government for the single currency region, France’s Le Monde newspaper reported yesterday.
“Nicolas Sarkozy is looking for ways to get Germany back into the European game,” Le Monde said.
“According to his entourage, the French president once again envisages the creation of a forum of heads of state and government from the euro zone, with a secretariat, which would be the true economic government of Europe.”
The newspaper noted that Germany had already rejected similar proposals for a formal body to co-ordinate economic governance in the euro zone. But it said Paris believed firmer budget commitments by euro zone governments and other concessions, such as approving Mr Weber to succeed Mr Trichet as president of the ECB, could help sway Berlin.
Meanwhile, the head of the IMF, Dominique Strauss-Kahn, was yesterday reported to say that the Spanish government’s package of austerity policies was strong and moving in the right direction. – (Additional reporting Reuters)
