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[Rogerdodger]

PAPER: European banks sitting on $24 trillion of toxic assets...
A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document.

www.telegraph.co.uk/finance
11 Feb 2009

“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,” the EC document, seen by The Daily Telegraph, cautioned.

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.

[Rogerdodger]

Ireland to take control of banks...

Ireland moved toward greater government control of its financial system Wednesday by bailing out its two largest lenders, while shareholders in Fortis, once the biggest bank in Belgium, derailed state-led plans to sell the nationalized business to BNP Paribas of France.

The fundamental problem is that almost no one knows what is on the balance sheets of most banks, and as the recession deepens, even once solid lenders are being dragged down by uncertainty and investor nerves. Some analysts say it may be time for policy makers to do what they have been studiously trying to avoid: full-scale nationalization, at least in certain countries.

He projected the main Irish banks would need at least €25 billion in total to plug the huge write-downs on the €150 billion that he estimated they loaned to developers and other related projects in Ireland and Britain in recent years before the collapse of their property markets. "Injecting the first €7 billion is a de-facto nationalization," he said. "And nationalization of the whole Irish banking system is a strong probability."

A central problem, analysts say, is that there is no rule book. But many point to the contrasting examples of Sweden and Japan.

During the 1990s, as its banks were sinking under the weight of bad debts, Sweden carved off all the banking industry's troubled assets and put them into a "bad bank," where they could be sold over time.

With the banks effectively bankrupt, the government wiped out existing shareholders, but then, instead of shutting the banks down, it used taxpayers' money to provide enough capital to allow the banks to resume normal lending.

Many former Swedish officials have said that the only way to avoid the conundrum is for the United States and some European governments to be prepared to take full ownership - temporarily - of some big banks.

In Japan, by contrast, officials allowed the situation to slide for years after growth slumped with the bursting of the asset price bubble in 1990. Eventually, toward the end of the decade, the government established a "bridge bank" to assume bad assets from the commercial banks and sell them off. Weak lenders were closed or merged.

Edited by Rogerdodger, 11 February 2009 - 10:53 PM.

[kavaron]

And today they have changed the topic to "European bank bail-out could push EU into crisis" It looks like the old title could cause panic.