New Warning On European Banks

The European Banking Authority (EBA) just called for urgent action to be taken in regards to European banks’ bad loans. Because Italy is not the only country having to grapple with this problem: EBA’s chairman, Andrea Enria, is worried that ten European countries have more than 10% in non-performing loans (NPLs), which shows the extreme fragility of their banking system. Those NPLs are loans for which the payments are late for 90 days or more. Here are the NPL ratios of the banks of those ten countries (source: EBA’S Risk Dashboard, pp. 10 and 27):

Greece 47.1%

Cyprus 46.7%

Portugal 19.8%

Italy 16.4%

Slovenia 16.3%

Ireland 14.4%

Bulgaria 13.2% *

Hungary 12.8% *

Romania 10.7% *

Croatia 10.5% *

(* non-members of the euro zone)

We can see already that the banking systems in Greece and Cyprus are factually in default, since almost half of their loans are NPLs – they can only survive with money injections from the EU and the IMF. And several countries are in bad shape, the last four not being members of the euro zone, which adds the risk of exchange (a possible collapse of their currency). With one out of five loans not performing, Portugal’s banking system isn’t far from collapsing. Even Ireland, though it looks like it’s doing better economically, has an NPL ratio to be concerned with.

But the big chunk, of course, is Italy, with 276 billion € in NPLs, according to the EBA, or 360 billion €, according to the ECB (we’ve discussed this before). Furthermore, the “no” victory in the constitutional referendum held last December 4 has pushed Matteo Renzi to resign, which marks the start of a high risk period of political uncertainty. When will the anticipated elections take place? Can Beppe Grillo’s 5-Star Movement – against the euro and leading the polls – win them? These questions are paramount because, of course, a banking crisis followed or not by an exit from the euro would have systemic repercussions on the whole of the euro zone, with France being the first domino likely to fall, as we’ve seen.