European Banks May Need 25 Trillion Bail-Out, Secret EC Document Warns

European banks sitting on GBP16.3 trillion of troubled assets may suffer massive losses, The Daily Telegraph reports, citing a confidential Brussels document.

European Commission officials have estimated that impaired assets may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the trading book total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets. In addition, so-called ‘available for sale instruments’ worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.

A secret 17-page paper discussed by European Union finance ministers Tuesday (11/02/09), also warned that government attempts to buy up or underwrite such assets could plunge the E.U. into a deeper crisis.  National leaders and E.U. officials share fears that a second bank bailout 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 the U.K. to pay it back.

        “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 gross domestic product in member states,” the European Commission document, seen by The Daily Telegraph, cautioned.

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.

Source: telegraph.co.uk

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