Satyajit Das: Zombie banks are just one of the problems the eurozone still faces

Das Capital: European governments are resorting to tricks to resolve their banking problems

While the timing of the re-emergence of the eurozone debt crisis remains unpredictable, the probable trajectory is more easily discerned.

First, continued weakness of the real economy will increase financial pressure on European countries. During 2013, European economies recorded positive growth, technically ending the recession. However, excluding Germany and France, the levels of economic activity remained low.

Ever-optimistic European governments and policy makers now proclaim a stabilisation or even a lower rate of decline as an indication of the success of their policies. The EU’s economic affairs commissioner, Olli Rehn, provided an interesting summary: “The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.”

European forecasts of recovery are over-optimistic. The turnaround may prove fragile, given deteriorating conditions in emerging markets which have been major buyers of European exports. Increases in the value of the euro may also affect eurozone exports.

Second, banking sector problems will continue. European banks may have as much as €1trn (£840bn) in non-performing loans. Italian banks alone may have as much as €250bn of these.

The new round of asset reviews may reveal eurozone banks’ need for extra capital, but it is unclear where the money for recapitalisation is going to come from.

Increasingly, European governments are resorting to tricks to resolve the problems of their banking systems, including inadequate stress tests, overly optimistic growth and asset price forecasts, and some unusual accounting stratagems. For example, Spain is seeking to convert €51bn in deferred tax assets resulting from loan losses into core capital to meet minimum requirements. If successful, this would represent about 30 per cent of Spanish banks’ core capital.

Without some urgent and resolute action, bad debts and weak capital positions will lead to “zombie banks”, unable or unwilling to supply credit to the economy and so restricting any recovery.

Third, much-needed structural reform of labour markets and entitlements will be slow, reflecting weak economic activity and also the unpopularity of many such measures. In addition, the relative stability of the past 12 months has lulled governments into a false sense of security, reducing the urgency of pursuing economic restructuring.

Fourth, political tensions, both national and within the eurozone, are likely to increase.

As shown in Greece, Portugal, Spain and Italy, weak economic conditions have increased pressure on current governments, highlighting the political differences and fragility of ruling coalitions.

Many countries also have domestic issues that contribute to political instability. In Spain there is the bribery scandal involving the ruling Popular Party. In Italy, continued political volatility centred on a fragile coalition government and the legal difficulties of former prime minister Silvio Berlusconi remain.

Debate on crucial policy measures is being held hostage to these political dramas. Italy is living up to its former dictator Benito Mussolini’s observation: “Governing the Italians is not impossible, it is merely useless.”

Across the eurozone, Germany’s repeated rejection of any steps amounting to a mutualisation of debt or hidden transfer payments, as well a reluctance to increase German commitments (increasingly supported by northern European nations), will complicate crisis management. Little is expected to change under the new German government.

The slow, rancorous process of eurozone negotiation will not help. The French President, François Hollande, provided a candid diagnosis: “The problem with Europe is that there are others involved.”

Economic and political pressures will manifest themselves in a number of ways.

Weaker countries may require extensions of existing loans, additional assistance or debt writedowns.

Credit ratings are likely to be under further pressure. Italy’s current rating (BBB with a negative outlook)) is perilously close to non-investment grade. Stronger economies are not immune, facing ratings pressure from the financial burden of supporting their weaker EU partners, and from the general European and global economic weakness.

Problems within the banking system will continue to simmer, and without strong growth (which is looking unlikely) Europe’s debt problems may prove intractable.


Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
'Irritatingly Disneyfied': fashion vlogger Zoella
voicesVicky Chandler: Zoella shows us that feminism can come in all forms
ebooksAn unforgettable anthology of contemporary reportage

nflAtlanta Falcons can't count and don't know what the UK looks like
Arts and Entertainment
High notes, flat performance: Jake Bugg

Review: Despite an uphill climb to see Jake Bugg in action, his performance is notably flat

The Putin automaton will go on sale next month in Germany
videoMusical Putin toy showing him annexing Crimea could sell for millions
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London