Pressure on the European Banking Sector

Pressure on the European Banking Sector

Trading Features / Strategies from Simon Denham of Capital Spreads.

The German government finally succumbed to the pressure of the credit crunch and banking crisis yesterday by plunging €10bn into Commerzbank.

The bank is a major constituent of the German economy and lends to millions of their customers both private and institutional and this indicates once again just how reliable the whole of the economy, from start to finish, is on banks.

Whilst such a bailout secures many of the bank’s jobs (much to the gripe of others who blame them solely for this situation) and assists in kick starting the free flow of money in an attempt to prevent a serious recession, it is something that German and European tax payers will have to foot the bill for in the years to come.

Like our very own RBS, Commerzbank is in the middle of buying Dresdner for a mere €9.8bn all of which is another huge and bitter pill to swallow considering Commerzbank’s market capitalisation is only €3.8bn.

Whilst this recent action should hope to make the deal go through it will just make the recovery that much harder and longer.

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Other European banks have been warning of their losses as the value of many of their debt assets continue to tumble. Credit Suisse and BNP Paribas are two of the huge European banks that have also suffered in the face of this crisis.

A friend at Credit Suisse recently told me he was the last person he could see on his whole floor in the Canary Wharf office. Not a very comforting fact.

So not only is the European banking sector suffering just as badly as the UK, but the cracks are really beginning to show in other areas. Consumer, economic and industrial confidence all plummeted to new lows yesterday and in Spain the number of unemployed reached three million for the first time ever.

Spain’s economy in the last 15 years has been built on property and the activity over the last year has taken its toil. Many of the developments now stand half built and most of them will have to be knocked down. The situation is not going to get any better and whilst their politicians say their unemployment hasn’t reached the bottom, but won’t hit four millions, they are more optimistic than I am.

With inflation dropping like a stone and such dire economic data from the Euro zone the pressure is ever building for the ECB to take similar action to that of the Bank of England. Their rates currently stand at 2.5% and are expected to be slashed by at least 0.5%.

The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.

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'Pressure on the European Banking Sector' edited by DB, updated 11-Jan-09

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