Eurozone banks face $2.3 trillion firesale, says IMF

EUROPEAN banks could be forced into selling off $2.3 trillion worth of assets as they battle to regain investors’ trust, the IMF warned yesterday.

The Washington based fund expects EU-based banks to sell almost seven per cent of their total assets – a staggering $2.3 trillion – over the next 20 months as they attempt to strengthen their balance sheets.

It expects the majority of this deleveraging to come from banks shedding non-core assets and securities, but says one fourth will come from a reduction in lending – reducing credit supply by an estimated 1.7 per cent.

The IMF – which based its forecasts on an analysis of 58 large EU-based banks – warns that the scale of the sell-off will exacerbate the “mild recession” it is currently predicting for the Eurozone this year. “A large scale and synchronised deleveraging by European banks could do a serious damage to asset prices, credit supply and economic activity in Europe and beyond,” said José Viñals, head of the IMF’s monetary and capital markets department.

The IMF warns an asset firesale would also hit US banks via the derivatives market, despite their lack of direct exposure to European banks.