Eurozone banks face 195 bln euro writedowns to end 2011-ECB

* Banks face further 195 bln euros writedowns to end 2011

* ECB says public finances pose biggest stability risks

* Sees significant risk of abrupt global capital moves

By Krista Hughes

FRANKFURT, May 31 (BestGrowthStock) – Euro-zone banks face another
195 billion euros ($239 billion) in potential write-downs to the
end of 2011 in a second wave of losses from the financial
crisis, the European Central Bank said on Monday.
In its latest Financial Stability Report, the ECB said
public finances posed the biggest threat to the region’s
financial steadiness as high debt and deficits continue to
unsettle investors, and floods of new government bonds could
hamper companies’ and banks’ access to market funding.

Hazardous contagion channels and adverse feedback loops had
already opened between the financial system and public finances,
although new steps to combat the crisis — including the ECB’s
government bond buys — had considerably eased contagion risk.

“Sizeable fiscal imbalances remain, and the responsibility
rests on governments to frontload and accelerate fiscal
consolidation so as to ensure the sustainability of public
finances, not least to avoid the risk of a crowding-out of
private investment while establishing conditions conducive to
durable economic growth,” ECB Vice-President Lucas Papademos
said.

In what Papademos said was a “second wave” of writedowns
from the financial crisis, the ECB estimates banks will need to
make provision for further losses in 2010 of 90 billion euros
and 105 billion in 2011, the first time it has given an estimate
for next year.

This comes on top of the estimated 238 billion euros already
written down to cover bad loans by the end of 2009. But higher
loan writedowns were offset by a better outlook for securities,
with some banks likely to see write-backs of as much as 32
billion euros.

Overall, the ECB said total write-downs from bad loans and
securities between 2007 and the end of 2010 were likely to be
lower than earlier expected, at 515 billion euros from 553
billion forecast in December.

But there was a risk writedowns would be more than
estimated, particularly if heightened sovereign risk and
second-round effects from budget belt-tightening dragged on
economic growth.

Risks to the growth outlook appeared broadly balanced but
the ECB warned a shortfall could turn many risks into reality.

“Many of the vulnerabilities highlighted in this report
could be unearthed by a scenario involving weaker-than-expected
growth,” Papademos said.

“The downturn has ended but the recovery is moderate.”

RISKS TO BOND YIELDS

The ECB said heavy issuance of government bonds was not just
a problem in terms of potentially crowding out other investors,
but in the United States would put upward pressure on bond
yields which investors might not be prepared for.
Although foreign purchases of U.S. bonds and notes had
increased in the last six months — taking foreign reserves in
some countries to well above pre-crisis levels — this could
reverse.

“There remains a significant risk of abrupt global capital
movements,” the report said, noting there was still insufficient
exchange rate flexibility on the part of some emerging
economies.

An abrupt increase in U.S. long-term bond yields could cause
the cost of capital to increase and move investor sentiment away
from the United States, triggering a flurry of market moves,
although the risk was remote, the ECB said.
Already some banks and investors had built up what appeared
to be “sizeable” bets that the yield curve would flatten in the
medium term.

“This means that they may not be sufficiently prepared for
an unexpected further steepening of the yield curve, as occurred
in the U.S. bond market in early 1994, which might leave banks
and other investors exposed to risks of large losses on fixed
income portfolios and interest rate derivative positions,” the
ECB said.

Ten-year U.S. government bond yields rose by 3 percentage
points in 1994 and the ECB said now, as then, rates were
historically low, although a repetitition of the turbulence
seemed “unlikely”.

In the euro zone, low official interest rates were helping
households to service loans but there was a risk of future house
price falls and rate risks might also be rising.

Companies, for their part, faced challenges of low profits,
high leverage levels and tight bank lending standards, while
conditions in commercial property markets were especially
challenging with rents in some states down about 30 percent on
an annual basis.

The ECB also said there was a risk of asset price bubbles in
emerging market economies from a sharp increase in net
investment inflows, forecast to rise by 66 percent in 2010, the
biggest annual rise in more than 15 years.
“Although this is not assessed as posing a material risk for
euro area financial stability at the current juncture, it will
warrant close monitoring in the period ahead,” the ECB said.

Investment Tools
(Editing by Stephen Nisbet)

Eurozone banks face 195 bln euro writedowns to end 2011-ECB