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European Banks Hold $24 Trillion In Toxic Assets

February 12th, 2009
While Timothy Geithner, U.S. Treasury Secretary, continues his prevarication in Washington D.C., dancing around the issue of specificity as to what exactly President Obama plans to do about the financial insolvency of America’s banks, a document leaked to the British newspaper, The Daily Telegraph, suggests an even more frightening level of banking insolvency infecting the financial world.

The European Commission is the executive branch, based in Brussels, that rules over the 27 nations that constitute the European Union. In the confidential EC document perused by The Daily Telegraph, its authors revealed that European banks may be holding as much as 18.6 trillion euros in toxic assets, roughly equivalent to $24 trillion dollars. The secret document issues the stark though not surprising warning to the political leaders of the member states of the EU that the amount of money required to salvage the European banking system, which had only months ago received its own version of a TARP-style bailout, would defy the financial and political capabilities of those countries.

The language in the EC document states the cold facts with harsh simplicity: “estimates of total expected asset write-downs suggest that the budgetary costs-actual and contingent-of asset relief could be very large both in absolute terms and relative to GDP in member states.” This assessment recognizes that whatever portion of the $24 trillion dollars of toxic assets European banks have on their balance sheets that will need to be written off, and that proportion is clearly substantial, cannot be made good by the European Union. To put that $24 trillion figure in perspective, it exceeds by at least six trillion dollars the combined GDP of the entire EU, and dwarfs the GDP figure for the United States, which stands at $14 trillion.

With the growing recognition that the U.S. and U.K. banking systems are effectively insolvent, the secret report issued by the European Commission reveals that the Global Economic Crisis has metastasized to the point where the damage to the world’s financial system is even more egregious than earlier bleak estimates. As the costs to the public purse, meaning the taxpayers, multiplies exponentially, some policymakers are beginning to understand that infinite bailouts of insolvent banks are an unsustainable model for resolving the crisis. As the EC reports puts it, “it is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems…such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance.”

Alas, here is the contradiction. The degree of recapitalization essential for restoring a solvent and functional banking system far exceeds what policymakers in the U.S., U.K. and remainder of the EU have committed thus far. Yet, as the EC report makes clear, providing the required injection of new capital into the banking systems is not feasible for practical and political reasons. So what we are left with are still more costly bailouts that will overwhelm with debt generations of Americans and Europeans, while mummifying essentially moribund banks in a state of dysfunctional preservation.

Now that the banking collapse that has ensued during the Global Economic Crisis has spread from America to the European continent, are Asian banks immune to this contagion? Even if they have so far been spared the worst ravages, they should not feel overly secure. The rampant demand destruction sweeping the globalized economy will inevitably transform collateral held by Asian financial institutions into under-performing assets on their balance sheets. Once that happens, will any part of the globe retain a solvent, functional banking system?

As the news gets more bleak and dire, the time remaining for an effective policy response to the global banking collapse is rapidly approaching zero.









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