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Eurozone debt crisis will hit in 2013

The “real impact” of the European debt crisis will not arrive until 2013, as bank balance sheets contract by record margins, further constraining the supply of credit to businesses and consumers.

According to Ernst and Young, banks will shrink their balance sheets by £1.3 trillion over the course of 2012 due to asset disposals and a contraction in lending activity. This will be at a sharper decline than during the financial crisis.

This will result in a contraction in corporate lending by 4.8% in 2012, while consumer loans will fall by 6.6% - the fastest pace of lending contraction on record for the Eurozone.

The next year looks even more concerning, as “non-performing loans” in the Eurozone will peak at 6.5% of all outstanding loans next year - a record high for the common currency. These loans are a debt which is either in or close to defaulting.

Commenting, Andy Baldwin from Ernst & Young said: “While the ­effect of … a combination of the deteriorating economy and the recurrent crises of confidence in the market … on bank balance sheets in 2012 is worrying, the real impact will not be seen until 2013, when [loan defaults] will hit harder than many are expecting.”

Leniency from lenders to defaulting debtors is masking the effects of non-performing portfolios, and as the economy worsens, a larger proportion of these loans will be pushed into default status, and will force banks to realize their losses and constrict further lending.

While larger firms will be able to draw down cash balances or access alternative sources of funding, smaller firms will struggle.

This was posted in Bdaily's Members' News section by Ruth Mitchell .