The Telegraph’s Ambrose Evans-Pritchard has a chilling column today in which he revels just how leveraged Europe’s banks are and how difficult it will be for them to rollover their debts or sell assets. This plays into the deleveraging theme that has eviscerated markets in recent months and implies there is a long way to go before it’s over.
The IMF data shows that Tier 1 capital levels of European banks are roughly half the levels of US banks. In effect, the Europeans and British have taken on twice as much debt leverage in a breakneck pursuit of expansion and profits.
The elastic is now snapping back with a vengeance. Citibank warns that European banks face an “enormous” capital deficit. “However you look at it, they are terribly over-leveraged,” said Matt King, the bank’s credit strategist.
“They are going to have to raise $400bn in fresh capital, which is four times as much as they have done so far. But the money is not there. They could sell assets, but at what price? There is a risk of eating through their foundations,” he said.