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Kenneth Rogoff: “A Lot of Insolvent European Banks”

Posted by Larry Doyle on July 7, 2010 5:30 AM |

Kenneth Rogoff

Should the European Union run bank stress tests or not? While that question has been hotly debated over the last few months, we received an answer today from one of the most highly respected economists in the world. Who might that be? Harvard’s Kenneth Rogoff, a Thought Leader and Sense on Cents Economic All-Star.

I have often referenced Rogoff’s work over the last eighteen months (go here) and hold him in the highest possible regard. So, about those European banks and the hotly debated stress tests? What does Rogoff think? Are you sitting down?

In a Bloomberg commentary, European Banks’ Hidden Losses Threaten EU Stress Test, we learn:

“There are a lot of insolvent European banks and the question is whether we’ll see them because they give us decent data,” Kenneth Rogoff, the Harvard University professor and former International Monetary Fund chief economist, said in a Bloomberg Television interview in Hong Kong. “They need a lot of restructuring. They’re in denial.”

Where do the bulk of these banks reside?

Analysts say they are most concerned about Germany’s state- owned lenders and Spanish savings banks because of their souring real estate loans. Swiss, U.K. and Nordic banks are safer investments than many euro-zone lenders because they’re less exposed to the sovereign debt crisis, have raised more capital and booked more writedowns, Hoffmann-Becking said.

Landesbanken, the state-owned regional wholesale banks, have been reluctant to write down their property investments, according to Julian Chillingworth, chief investment officer at Rathbone Brothers Plc, which manages about $21 billion.

“The Landesbanken system probably needs further reform,” said Chillingworth, who’s based in London.

Spain’s 45 regional savings banks are facing rising losses after the country’s property crash. The lenders have 241 billion euros in Spanish property loans, the Bank of Spain said, some of which are souring as developers default and prices fall after a decade-long housing boom.

Spanish savings banks may be hiding losses on home loans by taking non-performing out of securitized transactions, according to CreditSights Inc. By carrying the bad loans on their own books the so-called cajas sidestep downgrades to their mortgage-backed securities, the independent bond research firm said in a report.

German banks’ writedowns on loans and securities will probably reach $314 billion by the end of 2010, with state-owned lenders and savings banks facing the bulk of the losses, the International Monetary Fund said in a report in April.

“There is a pattern in Europe of trying to muddle through without taking the hits with the hope if you don’t take the pain things will be ok,” said Raghuram Rajan, former IMF chief economist and a professor of finance at the Booth School of Business at the University of Chicago.

Before anybody here in the U.S. gets complacent and thinks that our banking system has addressed issues which the Europeans neglect, let me remind you of the massive, hidden and unrecognized losses in our banks centered around home equity lines of credit (helocs), second mortgages, and commercial real estate.

Regrettably, the European misery has American company.


  • Mike

    No need to fear Larry, the European stress tests will give us a great idea of whether the banks are healthy enough to survive another financial crisis.

    I think I’ll buy up some Spanish Caja MBS now that they’ve been cleaned off.

  • fred


    Why do you keep giving the Fed a free ride, (lack of scrutiny). I have to turn to Zero Hedge for information. Great piece ZH today on how the Fed may be continuing to fund the treasury (US deficit) thru the banks even after it (Fed) said liquidity(QE) programs had ended. Are bank free reserves being used by banks to covertly carry on the Feds (helicopter Ben’s) adgenda? What did the banks get in return? LD, if anyone can get to the bottom of this its you.

    • fred


      After the US bank stress test scam, I have assumed that excess reserves would become additional required reserves as defaults and delinquencies (bad loans)were finally recognized on bank balance sheets.

      What will be the condition of bank sheets now if interest rates rise (principal declines) and bad loans still aren’t recognized? Currency devaluation?

    • LD


      I have no doubt that the fed and treasury will use any and all means necessary to funnel funds and any other means of liquidity into the system. I wish that I were a more astute Fed-watcher but I watch the Fed like I hit my long irons, that is, not very well.

      I have not totally neglected the Fed, though. The Sense on Cents library for Federal Reserve includes:

      Sense on Cents/Federal Reserve .

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