New Debt Doubts Battering Europe -- Now Fears Hit Banks Holding Government Debt     Print Email

Bank debt is the newest bad news that threatens the already tenuous financial stability of many European countries. This new problem is an outgrowth of the crisis of government debt that erupted in Greece, now spilling over onto other European countries’ credit ratings. Hungary has now joined the ranks of countries that might have to resort to a default of national debt.

Even though it is not in the eurozone, its plight has fueled the doubts about the outlook in Europe. And the focus of concern has now widened to include not only speculation about whether some countries might default but also questions about which banks might be hurt, and how badly, by one or more government defaults.

Bond buyers are jittery about this new question. Which banks are holding these government debts and how exposed are they to the risk of a default? “It’s a $2.6 trillion mystery.” Most European banks have not disclosed their exposure to cross-border loans that might go bad. “The problem is, alas, that no one – not investors, not regulators, not even bankers themselves – knows exactly which banks are sitting on the biggest stockpiles of rotting loans,” the New York Times reports.

If banks do not become more transparent about their records, the levels of insecurity and market distrust will only magnify, smothering any chance for a positive solution in the future.

This hidden debt crisis is only made more perilous due to the financial constraints on governments themselves. Governments, such as Greece, Portugal, and Spain, who are so mired in debt themselves, will not be able to aid or support banks if they need to be bailed out. Much of the debt from these countries is held by banks in Germany and Austria, but even these stronger economies – in the eurozone -- have joined the skepticism about the euro’s outlook and about bonds being issued by EU countries. For years, EU countries not in the eurozone have contracted loans in euros because of the comparatively low interest rates in the eurozone. Now countries such as Hungary are faced with the need to repay debts in euros using their own devalued national currencies.

Meghan Kelly, European Affairs