IMF: Cuts in European bank lending to drag growth

Apr 18, 2012, 3:21 PM

Associated Press Writers

WASHINGTON (AP) – The International Monetary Fund warned Wednesday that European banks are under pressure to preserve capital and could cut back sharply on lending over the next two years, slowing the region’s growth.

The predicted credit crunch is a major reason why Europe’s economy is expected to suffer a mild recession this year and barely grow in 2013, the IMF said in a report on the global financial system released Wednesday.

The 17 countries that use the euro will see their economies shrink by 0.3 percent this year, and expand by only 0.9 percent in 2013, the IMF has forecast.

But the slowdown could be worse if European governments don’t follow through on pledges to cut budget deficits and build up their bailout fund, the global lending organization said.

Large banks based in the European Union may reduce their balance sheets _ which include outstanding loans, securities and other assets _ by as much as $2.6 trillion through the end of 2013, the IMF said. That’s about 7 percent of their total assets.

About one-quarter of that reduction will come from reduced lending and could shrink the amount available for credit by 1.7 percent.

Some reduction in credit, or “deleveraging,” is necessary, the IMF said. Banks aren’t able to borrow as freely as in the past and governments are requiring them to hold more capital.

“But like Goldilocks, the amount, the pace, and location of deleveraging must be just right,” said Jose Vinals, the IMF’s financial counselor. “Not too large, too fast or too concentrated in one region or country.”

European leaders have taken many positive steps to shore up their financial system, the IMF said. The European Central Bank has provided roughly $1 trillion in cheap, low-interest loans to European banks since December. New governments in Italy and Spain are cutting budget deficits and reforming their labor markets. And European leaders have agreed to set up a bailout fund, or “firewall,” to backstop debt-ridden countries if they are unable to borrow on private markets.

But if governments fail to carry through with those plans, European banks may cut back further on lending, the fund said. Under its “downside scenario,” the amount of credit available would shrink by 4.4 percent and the eurozone’s economy would be 1.4 percent smaller by the end of 2013.

Conversely, if European policymakers took additional steps, such as closing down or restructuring weak banks and using the bailout fund to recapitalize larger institutions, the economy would be 0.6 percent larger than currently forecast.

Raising capital can be a difficult step because it can dilute shareholders holdings. The IMF also warned that national regulators must restrain banks from using money for payouts of dividends to shareholders and bonuses to top bank executives.

The IMF notes that the central bank’s lending has given European officials more time to push the continent’s shaky banks to raise new capital. The EU’s European Banking Authority is already pressing to do that. It has pressured banks to increase the size of their financial reserves compared to their risky loans and investments _ but it has urged them to do it by finding new capital, not by cutting back on loans.

Even so, the IMF points out that most responsibility for overseeing banks remains at the national level, where authorities have been slower to make banks take tough measures.

(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)

United States News

In this image from video released and partially redacted by the city of Memphis, Tenn., on Jan. 27,...
Associated Press

Tyre Nichols documents say officer never explained stop to him

The officer who pulled Tyre Nichols from his car before police fatally beat him never explained why he was being stopped, newly released documents show.
1 day ago
A woman sits on the rubble as emergency rescue teams search for people under the remains of destroy...
Associated Press

Turkish leader acknowledges ‘shortcomings’ following earthquakes

The president of Turkey acknowledged “shortcomings” in his country’s response to the world’s deadliest earthquake in more than a decade.
1 day ago
This image provided by the U.S. Navy shows sailors assigned to Explosive Ordnance Disposal Group 2 ...
Associated Press

Not just balloons: How US sees China spying as major worry

The Chinese government has been targeting U.S. industry and government agencies with a variety of worrisome spy operations.
1 day ago
U.S. President Joe Biden delivers the State of the Union address to a joint session of Congress on ...
Associated Press

President Joe Biden in State of Union attempts to reassure condition of nation

President Joe Biden called on Republicans in his State of the Union speech to work with him to “finish the job” of rebuilding the economy.
2 days ago
President Biden gives his State of the Union address during a joint session of Congress at the U.S....

Watch: President Joe Biden gives 2nd State of Union address

President Joe Biden gave his second State of the Union address in office to a joint session of Congress at the Capitol on Tuesday night.
2 days ago
Federal Reserve Chair Jerome Powell speaks at the Economic Club of Washington, Tuesday, Feb. 7, 202...
Associated Press

Fed’s Powell: Strong hiring could force further rate hikes

Federal Reserve Chair Jerome Powell said Tuesday that if the U.S. job market further strengthens in the coming months or inflation readings accelerate, the Fed might have to raise its benchmark interest rate higher than it now projects.
2 days ago

Sponsored Articles

Day & Night Air Conditioning, Heating and Plumbing

Company looking for oldest air conditioner and wants to reward homeowner with new one

Does your air conditioner make weird noises or a burning smell when it starts? If so, you may be due for an AC unit replacement.
Fiesta Bowl Foundation

Celebrate 50 years of Vrbo Fiesta Bowl Parade magic!

Since its first production in the early 1970s, the Vrbo Fiesta Bowl Parade presented by Lerner & Rowe has been a staple of Valley traditions, bringing family fun and excitement to downtown Phoenix.
Quantum Fiber

Stream 4K and more with powerful, high-speed fiber internet

Picking which streaming services to subscribe to are difficult choices, and there is no room for internet that cannot handle increased demands.
IMF: Cuts in European bank lending to drag growth