January 20, 2022

Off the Charts: In Europe, a Repeat of the Credit Crisis

In the euro area as a whole, the amount of credit outstanding has fallen to levels lower than they were a year ago, according to figures released last week by the European Central Bank. In some countries within the euro zone, including Italy and Spain, credit is falling at a faster rate now than it did during the first crisis.

The difficulty in obtaining credit seems likely to make it even harder for the countries that have been hurt the most to recover and begin to grow again. The figures show that while the E.C.B. has relieved the immediate financial pressures on both governments and banks by making it easy for them to borrow, it has not managed to extend that easy credit to those who need money the most.

The first of the accompanying charts shows 12-month changes in the amounts of loans outstanding in the 17 countries that make up the euro zone, and the lower charts show the state of lending in several of the countries. The bolder of the two lines in each chart shows the change in outstanding loans to nonfinancial companies, while the other line shows changes in total loans to households, a figure that includes both home mortgages and consumer loans.

In the middle of the last decade, loans were growing rapidly in many countries. Interest rates had fallen sharply as markets concluded there was no good reason for rates to be much higher in one euro zone country than another. After all, the currency risk was identical in all the countries.

In Ireland and Spain, the easy credit helped to finance large housing bubbles, which then burst during the crisis. In both of those countries, the amount of outstanding loans rose at a pace above 30 percent a year at the peak of the cycle.

A falling total of loans means that on a net basis, no new loans are being issued, although banks might be relending some of the money being repaid on old loans. In some cases, particularly in Ireland, the amount of loans outstanding has plunged not because loans are being repaid but because they are being written off.

Some countries seem unaffected. In Finland, which has been among the most vocal in demanding austerity in the troubled countries, the amount of loans outstanding continues to grow at a rate of more than 5 percent a year. In Austria and Germany, loan volume is also rising, although at a slower rate.

But in Portugal, the amount of corporate loans outstanding is now lower than it was in the spring of 2008, before the collapse of Lehman Brothers sent world credit markets tumbling. In Ireland, loan totals to both companies and households have fallen to 2005 levels.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/11/03/business/in-europe-a-repeat-of-the-credit-crisis.html?partner=rss&emc=rss

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Europe Persists in Seeking a Solution for Greece

“We’re continuing to work for a possible solution,” Michel Pebereau, chairman of BNP Paribas, the biggest French bank, said at the Paris Europlace conference, a gathering attended by hundreds of international bankers. Both the French and German banks have put proposals forward, he said, and “If those doesn’t work out, we’ll come up with something else.”

Several other bankers said the important thing was that banks had begun to work together to solve the crisis, and the fact that the stakes were so big meant they would find a way forward.

“Everyone here is anxious,” said one executive with the French unit of a major American financial institution, who said he was not authorized to speak on the record. “Everyone is interconnected. It’s not just a problem for Greece. All the banks are nervous and strongly desire a solution.”

Standard Poor’s said Monday that a proposal by French banks for helping Greece to meet its medium-term financing needs would constitute a de facto default, as banks would be required to roll over loans for a longer term at a lower interest rate. That deflated hopes that Greece’s problems might be brought under control soon.

French bankers had not contacted the ratings agencies before publicizing their proposal to roll over Greek debt to determine whether the agencies would consider such an action to constitute a form of default. “The French banks jumped too soon,” said one banker who was involved in designing the proposal.

French and German bankers were scheduled to meet Wednesday in Paris with central bank officials, under the auspices of the Institute for International Finance, which groups the world’s biggest financial companies, to discuss the way forward, according to people briefed on the plan who were not authorized to speak publicly.

They are to discuss not only the definition of “selective default” put forward by Standard Poor’s but also what would constitute a full-blown default, the people said. The difference is crucial, because in the latter case the European Central Bank would not be able to accept Greek debt as collateral.

Euro-zone finance ministers last week reached a deal to keep the Greek government operating through the summer but put off the question of how to provide a second bailout to meet its financing needs through 2014.

There is wide agreement that some kind of debt relief is necessary, and officials, particularly in Germany and the Netherlands, want banks to bear part of the pain of a debt restructuring. Negotiations are complicated by the fact that a declaration of default by the ratings agencies could cause a dangerous escalation of the crisis.

The German chancellor, Angela Merkel, said Tuesday that the opinions of the International Monetary Fund, the European Central Bank and the European Commission should be given more weight than those of the rating agencies, The Associated Press reported from Berlin.

“I trust above all the judgment of those three institutions,” Mrs. Merkel said.

Bank executives said the assessment of the International Swaps and Derivatives Association — whose members hold much of the Greek debt and the credit default swaps based on it — would probably be more important, in the final analysis, than that of the ratings agencies.

A Standard Poor’s rival, Moody’s Investors Service, said Tuesday that banks might have to book losses on their existing Greek bonds if they chose to roll over the maturing debt.

While European officials were trying to come up with a workable Greek bailout, the German government was defending itself against a lawsuit seeking to block its participation.

Speaking to the Federal Constitutional Court in Karlsruhe, Finance Minister Wolfgang Schäuble argued that the government had no choice but to back aid for Greece.

“A common currency can’t do without the solidarity of all members,” The Associated Press quoted Mr. Schäuble as saying.

Article source: http://www.nytimes.com/2011/07/06/business/global/06euro.html?partner=rss&emc=rss

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