Sign in / Join

€1 trillion bad debts hurting recovery of banks across the European Union, IMF warns

A recovery of banks across the European Union is being held back by €1trillion (£837bn) of bad debts being held on their books.

The International Monetary Fund warns that despite a reduction of €120 billion (£100 billion) of bad loans over the last year and a recovery in bank share prices, an economic upturn ‘is unlikely to fully restore the profitability of persistently weak banks’.

The IMF’s global financial stability report says the scale of the bad debts and the failure of countries such as Italy, Greece and Portugal to deal with them ‘impedes the scope for recovery’ and could lead to a fresh financial crisis across the EU.

International Monetary Fund financial counsellor and director Tobias Adrian as he answers a question on the Global Financial Stability Report at the IMF World Bank Spring Meetings

In a wide-ranging report the IMF experts also cautioned that there are several other risks on the horizon which could turn back market optimism and disrupt stability and recovery:

  • President Trump’s fiscal policy could push up global interest rates and force highly leveraged American companies to the wall.
  • Protectionist and populist policies could have a dampening effect on trade and growth, triggering an outflow of capital from emerging markets.
  • Credit in China has doubled in less than a decade to 200 per cent of total output and if the boom lasts much longer ‘the more dangerous it will become’.

IMF financial enforcers believe that Europe needs to follow Ireland and establish an agency to hold the ‘bad debts’ of their banks because until that happens there is little possibility of repairing them properly and getting them lending again.

In particular they argue that Europe’s domestic banks, without overseas interests, have the greatest challenge. It notes that three-quarters of them had ‘very weak returns in 2016’.

But Europe’s global banks, such as Deutsche Bank and Credit Suisse, also underperform compared to their fleet-of-foot American counterparts.

The report shows British lenders have been more ruthless than their counterparts in scything branches, with £728 million of assets per branch.

But this is still less efficient than Holland and Ireland. The lowest assets per branch are in Italy, Portugal and Spain.

The IMF says there are too many weak banks across Europe with ‘low buffers, too many with a regional focus and narrow mandate, or too many branches with low branch efficiency’.

The Fund’s chief enforcer Tobias Adrian calls for countries with the biggest challenges to address matters urgently, warning that ‘low profitability could incite systemic risks’.