A Lack of Lending at European Banks Increases the Fear of Stagnation

On the contrary, debt issuance by banks has slowed to a trickle at the same time that short-term interbank lending is drying up. The financing drought raises questions about whether banks will have enough money to refinance their own long-term debt and still meet demand for loans.

Less lending could further depress growth in Europe, which is already teetering on the edge of recession. “The euro zone economy has stalled and as the recent financial stresses feed into the real economy, it is likely to get worse still,” analysts at HSBC wrote in a note to clients on Thursday. A release of data showed that pessimism among manufacturers had reached levels not seen since the 2009 recession.

The fund-raising problems at banks stem directly from the sovereign debt crisis, which is having an insidious effect in a few ways.

Not surprisingly, investors are wary of banks that could suffer losses if Greece defaults on its debt, as seems increasingly likely. But the crisis has also raised doubts about the underlying health of the European banking system and whether governments would be able to step in to rescue their banks if there were another financial catastrophe.

“Banks certainly do not have enough capital in relation to their government bonds,” said Dorothea Schäfer, an expert in financial markets at the German Institute for Economic Research in Berlin. She has calculated that the 10 largest German banks would need to raise 127 billion euros ($171 billion) to bring their capital reserves to 5 percent of gross assets — a level she considers barely adequate.

“That could substantially heighten trust, I would even say would bring it back,” Ms. Schäfer said. But raising that additional capital would be politically perilous because it would probably require another taxpayer-financed bailout. Many of the banks that need capital are already owned by government entities and, because they are not listed on stock markets, cannot sell shares to increase their capital.

The banking industry is also fighting requirements that would require them to keep more ample reserves, which would cut into profits.

According to the standard used by regulators, banks are much better capitalized than they were in 2008. Banks in Europe had so-called core Tier 1 capital — the most durable form of reserves — equal to 10.6 percent of their assets at the end of June, according to calculations by analysts at Nomura. That compares with a previous low of 6.4 percent.

For that reason, some analysts say that the alarm about bank financing is overblown.

“I don’t think we’re overly concerned yet,” said Jon Peace, a banking analyst at Nomura. But he added, “Definitely we are watching the data week by week.”

He said that banks in Northern Europe, where government debt is less of a problem, were having an easier time raising money.

Ms. Schäfer said, though, that current measures of capital reserves were “useless” because they did not capture the risk from holdings of government bonds, which the International Monetary Fund this week estimated at 300 billion euros for European banks.

Regulations still treat European government debt as if it were risk-free, though it obviously is not. As a result, banks are not required to set aside extra capital to cushion against a government default. And holdings of government bonds are excluded from the calculation of capital ratios.

Sophisticated investors are aware of these shortcomings, which helps explain the drop in debt issuance recently. Since July, sales of bonds and other debt instruments have plummeted 85 percent compared with sales in the period a year earlier, according to Dealogic, a data provider in London.

“A lot of money has been lost,” said Kenneth Rogoff, a Harvard professor and former chief economist at the I.M.F., during an appearance in Frankfurt on Thursday. Greek default is inevitable, said Mr. Rogoff, author of a history of sovereign defaults. “Banks and governments may not have put it in their books,” he said of the losses, “but it’s gone.”

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