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Are European Banks On the Verge of Destruction?

June 30th, 2010

In February 2009, my blog referred to a story that appeared in The Daily Telegraph, a leading UK newspaper, headlined, “European bank bail-out could push EU into crisis.” The essence of the story was that The Daily Telegraph was shown a top secret document, leaked from the European Commission, the executive body that oversees the 27 nation European Union, which warned that the EU’s banking system was contaminated by an ocean of toxic assets. Though the story was ignored by the rest of mainstream media, for the most part, I think it is timely to look again at this secret EU document in the light of the current European debt crisis and growing rumours regarding the insolvency of many leading banks across the continent.

The confidential 17 page European Commission document warned that the European banking system could be holding as much as 18.6 trillion euros in toxic assets. Furthermore, in the wake of the European bank bailout that followed the collapse of Lehman Brothers, the document warned that the cost of a second Eurozone and UK bank bailout would exceed the financial capacity of the European Union. In other words, if Europe’s banking system enters a meltdown in the face of the sovereign debt crisis now plaguing European economies, the EU will be powerless to stop the implosion of the European banking and financial system.

Reviewing what the European Commission warned about more than a year ago, it appears that the document’s authors had an impressively prescient ability to forecast the current European sovereign debt and fiscal crisis. In stark terms, the EU document warned that, “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.”

With Greece essentially insolvent, Spain in the grips of its own sovereign debt crisis and the UK and Italy teetering on the edge, not to mention Ireland, Portugal and Eastern Europe, it seems to me that the worst case scenario hinted at in the leaked document more than a year ago is no longer a speculative possibility, but unfortunately a chillingly realistic forecast of what may very soon be the next great global banking crisis.

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