Economic woe in euro area will hit banks

 
Julian Harris
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ECONOMIC woes in the Eurozone are hitting the financial services industry, a new report claims this morning, despite political measures that have calmed the markets.

Loans approaching or at the point of default are set to hit an all time high, according to economists at Ernst & Young.

Non-performing loans “will rise above six per cent of total loans” across the Eurozone the group warned this morning. The figure “would be the highest level since the creation of the euro in 1999”.

“The unrelenting rise of non-performing loans is an under-acknowledged threat to banks’ capital levels,” said Ernst & Young’s Marie Diron.

“While the world’s attention is focused on losses on sovereign debt holdings, non-performing loans are creeping up on banks, as businesses in the euro area which they have lent to struggle against the weakening economy.”

GDP shrank by 0.3 per cent in the single currency area during the final three months of last year, official figures have indicated. Recent economic data appears to show that the Eurozone could be experiencing a technical recession with GDP shrinking again in the first quarter of 2012.

Ernst & Young’s latest financial services forecast predicts that the Eurozone economy will contract by 0.5 per cent in 2012, which is expected to drive down demand for new loans even further.

A bailout deal for Greece has eased some investors’ fears in recent weeks, while the European Central Bank (ECB), led by Mario Draghi (pictured), has pumped liquidity into the markets via its Longer-Term Refinancing Operation (LTRO).

“The LTRO has calmed the markets and given banks time to build capital via deleveraging, increasing retained profits and selective asset sales when the right buyer is found,” Ernst & Young said in its report, stating that banking assets and loans should recover to 2010 levels by 2015.

“In the short term, however, financial services in the Eurozone, and those businesses that they work with, will continue to feel the pinch of a weakening economy trapped in a low growth, low investment cycle,” it warned.