Banks in the UK, Spain, Ireland and Italy must set aside more money to cover potential bad loans, reads a report released Thursday by the rating agency Moody’s, warning that taxpayers in Europe might have to contribute again to bail out the banks, according to Reuters. European credit institutions already increased their share of billions of euros to cover potential losses due to unpaid mortgages and financial market turmoil. Much of these funds came from European governments.
“We believe that many banks, in particular in Spain, Italy, Ireland, and the UK, require material amounts of additional provisions to fully clean up their balance sheets. Some banks have in recent years delayed full recognition of embedded loan losses, partly by restructuring loans,” Moody’s warned in a report on global banking.
The Agency has not estimated the amount that banks need to cover any losses but warned that 2013 will be a volatile year for European banks. Moody’s expects that credit ratings of European institutions will remain relatively stable this year, after a series of downgrades in 2012. The perspective of the credit-rating agency assigned to U.S. banks is negative, while the outlook for credit institutions in emerging European countries, Asia-Pacific and Latin America is stable.
The International Monetary Fund recently estimated that European banks could be forced to sell assets of $2,800 billion in 2013 to reduce their risk exposure. Sale of assets would reduce by 9% the supply of credit to the eurozone periphery countries by the end of next year, affecting their economic growth.
If the European authorities will not fulfill the promise of establishing a common organization in charge with banking supervision and if the eurozone periphery countries will not continue adjustment programs, costs could be even higher, reaching $4,500 billion, with additional consequences on unemployment and investment. Providing loans to the eurozone periphery countries would decrease by 18%, warns the International Monetary Fund.
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