I.M.F. Warns of European Credit Risk

WASHINGTON (AP) — The International Monetary Fund warned Wednesday that European banks are under pressure to preserve capital and could slash lending in the next two years, slowing growth in the region.

The predicted credit squeeze is a big reason Europe is expected to have a mild economic recession this year and barely grow in 2013, the I.M.F, said in a report on the global financial system.

The economies of the 17 nations that use the euro will shrink by 0.3 percent this year, and expand by only 0.9 percent in 2013, the fund has forecast.

But the slowdown could be worse if European governments break pledges to cut deficits and build their bailout fund, said the I.M.F., a lending organization.

Large banks based in the European Union may reduce their balance sheets, which include outstanding loans and securities, by $2.6 trillion through 2013, the fund said. That is about 7 percent of their total assets.

About a 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 fund said. Banks cannot 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 José Viñals, the fund’s financial counselor. “Not too large, too fast or too concentrated in one region or country.”

European leaders have taken many steps to shore up their financial system, the fund said. The European Central Bank has provided $1 trillion in cheap, low-interest loans to banks since December. New governments in Italy and Spain are cutting budget deficits and changing their labor markets. And European leaders have agreed to create a fund, or firewall, to help debt-ridden countries if they cannot borrow on private markets.

But if governments do not carry through with those plans, European banks may further reduce lending, the I.M.F. said. Under its downside case, the amount of credit available would shrink by 4.4 percent and the euro zone’s economy would be 1.4 percent smaller by the end of 2013.

Conversely, if European policy makers were to take additional steps, such as closing or reorganizing weak banks and using the bailout fund to recapitalize larger institutions, the economy would be 0.6 percent larger than now forecast, the fund said.

Source:  NY Times


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