Euro bank deleveraging to reach $2.8-$4.5tn: IMF

 

The amounts represent 7.3-12 per cent of bank assets, said the IMF in its Global Financial Stability Report.

The expected amount of asset reduction by all sample banks is raised from the forecast in April. Then, the IMF expected the amount of $2.6 trillion in the scenario that business environment is the same. The amount was then expected to rise to $3.8 trillion if the environment was worse than expected. 

"Recent ECB action has helped to improve confidence. If this momentum is maintained through further policy measures, as in the complete policies scenario (when authorities step in to fully resusitate banks), bank asset reductions would amount to about $2.3 trillion (6 per cent of bank assets)," the IMF said.

The periphery bears the brunt of shrinking credit supply. The cutbacks in the supply of credit to the periphery countries are much larger than in the core euro area. The supply of total

credit in the periphery (including cross-border lending) is expected to decline 9-18 per cent in the two scenarios. 

Under the weak policies scenario, the credit supply shock from the EU bank deleveraging would lower periphery euro area GDP by more than 4 percentage points relative to the World Economic Outlook's baseline in 2013. In the core euro area, GDP would contract much less, in line with the relatively moderate impact on credit, but still significantly - by 1.5 percentage points relative to the WEO baseline. In the complete policies scenario, GDP atend-2013 relative to the baseline policies scenario would be two-thirds of a percentage point higher in the core, and almost 2 percentage points higher in the periphery.

Bank deleveraging in Italy and Spain is now underway, on path to bring credit-to-GDP ratios back to the 2003–04 levels by 2017.