Zombie Euro Banks Are Dead Men Walking, Warns ECB

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Many of the Eurozone’s banks are so debt-ridden they might never recover and are effectively zombie dead men walking.

The frank assessment of the problems with the Eurozone financial system came from the European Central Bank (ECB).

The report blamed risky loans, mainly against property, were fuelling rumours of another banking crisis just as governments and investors thought the stress had gone away.

The lingering recession was making the problem worse, because banks could not bring in the finance to settle the loans because their customers were struggling financially.

“2012 was a bad year for banks,” said Vítor Constâncio, the ECB vice president.

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Financial fortress

The review did not identify specific banks at risk, the ECB did explain the banks facing the worst problems were in countries facing high unemployment and plunging property prices – which would bring Italy, Spain, Portugal and Greece to the forefront.

Even some banks in the traditionally financial fortress of Germany are facing some difficulties – specifically over money loaned to the shipping industry.

The ECB tests the financial waters of the Eurozone every six months, but the latest scrutiny of the money men has special importance as the bank is about to take on the role as the chief regulator of all the single currency banks.

The report may signal a tougher attitude towards wayward banks, which the ECB accuses of underestimating risk and not building strong enough reserves to counter future problems.

Nevertheless, the ECB report was not all gloomy.

The ECB noted governments with severe economic problems, like Greece and Spain, could still raise money, and the likelihood of any countries defaulting on their debts remained slim and was decreasing.

Foot off the pedal

The Organisation for Economic Co-operation and Development (OECD) backed the bank’s assessment with a similarly damning report on the Eurozone.

The OECD warned that banks in the single currency are undercapitalised and that political leaders must push through reforms for tighter economic unity to make the currency stronger.

The report also observed that politicians had taken their feet off the economic union pedal as stress from the financial markets had decreased in recent months.

“The capital base of banks and other financial institutions needs to be stronger to remain steady if sovereign debt is written-down,” said the OECD.

“It is important to strengthen the capital of financial institutions so that they can withstand sovereign debt write-downs if rules prove insufficient to prevent sovereign crises,” the OECD report said.

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