European banks are in the midst of an emergency firesale of assets worth more than €10,000 (£8,000) for every single household in the continent, it has emerged.
The warning from the International Monetary Fund came 24 hours after it slashed its growth forecast for Britain’s economy by more than any other major developed country. It said that political leaders – especially those in the Eurozone – are running out of time to put right the economic problems weighing them down.
In its Global Financial Stability Report, the IMF predicted that Europe’s biggest banks will need to sell off $2.8 trillion of assets in the coming months – some $200bn higher than its estimate in the spring. The sum is equivalent to €10,350 for each of Europe’s 210m households, and will mean there is less money available to be lent to consumers, worsening the credit crisis.
The Fund added that if the euro crisis worsens, the scale of these sell offs could mount to $4.5 trillion – equivalent to €16,634.78 for each of the continent’s households (£13,394.58).
The deleveraging warning is critical to the fate of the European economy, since its major problem at present is that households and businesses are struggling to survive without regular access to credit.
Despite the efforts of the European Central Bank and other regulators to keep the financial system afloat over the summer, the Fund warned that the outlook had deteriorated since it last surveyed it six months ago. Speaking in Tokyo, where the IMF is holding its annual meeting, its head of financial stability, José Viñals, said: “The stakes are high. For instance, if pressures were allowed to continue, major EU banks’ total assets could be forced to shrink by as much as 2.8 trillion dollars, and possibly leading to a contraction in credit supply in the periphery by 9% by the end of 2013. In a more adverse case, as illustrated in our weak policies scenario, EU banks‟ assets could shrink by as much as $4.5 trillion, and lead to a reduction in the supply of credit in the periphery by up to 18%. In contrast, a rapid move to complete policies would avoid this economic damage.”
Although the Fund said the UK remains vulnerable, because of its proximity to the euro crisis and because of the size of its banking system, its financial institutions had at least “made progress through continued divesting and by cutting back noncore activities.”
The Fund warned late last month, however, that the financial system remains just as vulnerable to a future crisis as it did before the collapse of Lehman Brothers in 2008. This latest report will add further pressure as policymakers aim to try to repair the banking system.
Here are three of the most important charts from the GFSR. Those deleveraging forecasts:
A country-by-country table of how indebted various parts of the economy are. Click it to enlarge it.
And finally a similar chart measuring different aspects of banking stability across nations:
The full text of the report can be found online at the IMF’s website.