The European Central Bank's latest Financial Stability Review outlines two years of steep loan losses for European banks in 2010 and 2011.
While the ECB's total cumulative loan loss estimate since 2007 has come down to 515 billion euros from 553 billion previously, they expect 90 billion of bank write-downs this year followed by 105 billion in 2011. Thus loan losses are set to get worse before they get better.
Yet in addition to likely loan losses, it turns out that European banks have an enormous amount of debt that needs to be rolled over over the next few years, just as many European governments have.
Note some periphery economies such as Italy are faced with a particularly severe refinancing challenge over the coming years. Thus it doesn't help that private banks will be competing for vast amounts of creditors' dollars at the same time.
The ECB estimates that large euro-zone banks will have to extend, or roll over about half of their longer-term debt outstanding by the end of 2012.
"With several euro area governments also facing heavy financing requirements over the coming years…this raises the risk of bank bond issuance being crowded out," the ECB cautioned in its report.
...
Mr. Papademos warned about the dangers of an "adverse feedback between the financial sector and public finances continuing."
The risk is that such an over-supply of borrowing demand could cause the cost of debt to spike to unmanageable levels, for both weaker European banks and governments.
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