EUROZONE banks face writedowns of €195bn (£165bn) over the next 18 months, according to the European Central Bank (ECB).
The “hazardous contagion” of the sovereign debt crisis will spark a “second wave” of loan losses, it said yesterday.
The ECB said in its latest Financial Stability Report that the writedowns could be even bigger if heightened sovereign debt risk and the impact of government belt-tightening drags economic growth down further.
Any impairments will come on top of the €238bn in bad debts written off by the end of 2009.
The report also warned that banks could struggle to refinance long-term debts worth an estimated €800bn by the end of 2012.
Borrowing costs could surge as banks fight against highly indebted governments to find creditors on the bond market, the ECB said.
It added: “This would make it challenging to roll over a sizable amount of maturing bonds by the end of 2012.”
Meanwhile, the ECB said it has stepped up its purchases of Eurozone government bonds as it attempts to lift some of the pressure from embattled nations.
It began buying up Greek, Portuguese and Spanish bonds last month in an attempt to calm debt markets and support a stabilisation package for the euro agreed by the EU and the IMF.