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Satyajit Das: Zombie Banks Are Just One Of The Problems The Eurozone Still Faces

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While the timing of the re-emergence of the eurozone debt crisis remains unpredictable, the probable trajectory is more easily discerned.

First, continued weakness of the real economy will increase financial pressure on European countries. During 2013, European economies recorded positive growth, technically ending the recession. However, excluding Germany and France, the levels of economic activity remained low.

Ever-optimistic European governments and policy makers now proclaim a stabilisation or even a lower rate of decline as an indication of the success of their policies. The EU’s economic affairs commissioner, Olli Rehn, provided an interesting summary: “The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.”

European forecasts of recovery are over-optimistic. The turnaround may prove fragile, given deteriorating conditions in emerging markets which have been major buyers of European exports. Increases in the value of the euro may also affect eurozone exports.

Second, banking sector problems will continue. European banks may have as much as €1trn (£840bn) in non-performing loans. Italian banks alone may have as much as €250bn of these.

The new round of asset reviews may reveal eurozone banks’ need for extra capital, but it is unclear where the money for recapitalisation is going to come from.

Increasingly, European governments are resorting to tricks to resolve the problems of their banking systems, including inadequate stress tests, overly optimistic growth and asset price forecasts, and some unusual accounting stratagems. For example, Spain is seeking to convert €51bn in deferred tax assets resulting from loan losses into core capital to meet minimum requirements. If successful, this would represent about 30 per cent of Spanish banks’ core capital.

The aim of the game is not to be found to be bankrupt, the longer they can keep the plates spinning for the more hope it becomes someone else's problem or "real" growth materialises to rescue us all!

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