IMF: European banks do not perform their duty to real economy

Sharon Bowles, (ALDE, UK), President of the EU Parliament Committee of Economic and Monetary Affairs (on the left) during Economic Dialogue and exchange of views with Minister for Finance of Ireland Michael Noonan. (European Parliament photographic library).

Sharon Bowles, (ALDE, UK), President of the EU Parliament Committee of Economic and Monetary Affairs (on the left) during Economic Dialogue and exchange of views with Minister for Finance of Ireland Michael Noonan. (European Parliament photographic library).

During this week everybody took an interest on Europe’s and more so on Eurozone’s financial standing. During the last two days Jörg Asmussen, Member of the Executive Board of the ECB, the International Monetary Fund and the European Council Presidency came out to either criticise or reassure everybody that the European financial and banking system has made remarkable progress towards a sustainable status. The arguments in favour of the European financial system included the marked decrease of the Italian and Spanish sovereign bonds yields, the substantial betterment of the liquidity position of banks and the tangible progress towards the EU banking union, with a deal brokered in Brussels to make the European Central Bank responsible for supervising the major European lenders.

No need to mention that all those positive remarks came from Asmussen and the Irish Presidency of the European Council. Not surprisingly the IMF report painted a slightly different picture. Obviously Asmussen and the EU Council Presidency tried to focus on the bright side of the moon. More so the Irish Presidency, because the politicians who are powering it, have a very strong interest to appear active and successful.

Back in Dublin the Irish Press is following very closely what is happening in Brussels and the country’s minister of Finance, Michael Noonan, doesn’t leave the slightest opportunity to show off his abilities in managing the European affairs. By been seen that he is helping the entire Eurozone promote its financial stability, he expects not only a positive assessment by the Irish Press, but also a positive attitude by the Brussels authorities towards his country’s problems. This may greatly help Ireland reduce its debt burden and Noonan increase his political capital.

IMF’s criticism

It’s not the same with the IMF. The Fund’s Global Financial Stability Report is not of course unduly negative towards the European financial system, but nor it appears ready to overlook the drawbacks. In this respect the IMF report is observing that the European financial system doesn’t perform its duties towards the real economy. The relevant quote is very informative: “In spite of the recent improvements in market conditions, credit is not adequately flowing in the euro area periphery.
* Small and medium-sized companies, which are the backbone of employment, are particularly affected by the increased cost and limited supply of bank credit.
* The periphery corporate sector is also facing a large debt overhang, which was built up before the crisis.”

IMF’s report identifies also a weak tail of listed companies in the periphery that need to reduce their debt over time. The required debt reduction by these companies accounts for a fifth of the total debt of listed periphery corporates analyzed in the Global Financial Stability Report. This poses a challenge to their economies and financial stability.

IMF’s has also a very important observation for the entire Eurozone’s financial system. Says the GFSR: “Bank balance sheet repair has not been completed and progress has been uneven”. Let’s analyse those comments one by one.

What the IMF says in a few words here is that the European financial/banking system for one thing is not performing its duties towards the real economy, letting the small and medium enterprises out in the cold not caring to cover their financial needs. On the contrary the peripheral European banks have loaded with loans the listed companies, as if there were a hidden link between the two sides.
In this respect the IMF doesn’t go as far as to say that the peripheral banks accorded more loans than they should to listed companies, because bankers and banks had a lot to gain from that. This was however a true fact until 2009. All new stock issues along with every aspect of banking support and services to listed companies was undertaken by the same lenders. The links were and still are many and well hidden.

Last but not least the IMF says that the repair of the European banks balance sheet, meaning mainly recapitalisation and toxic asset cleanup, remain an open question. This is though a general observation and is addressed to the entire Eurozone banking system, peripheral and central. It is a direct hint that also the German and the French banks have not yet managed to come up with solutions.
All in all the IMF does not spare its criticism on European banks. Their lack of capital and their reluctance to serve the real economy are still two major unaccomplished tasks.

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