The European Central Bank has issued new “guidelines” for the big European banks to manage their 900 billion euro in non-performing debt. The ECB is giving the banks at minimum three years to clean up their books. This has infuriated the vulture funds that were looking to buy much of that debt for pennies on the euro. ECB realized that such a selloff could be a trigger for a wave of bank failures or major crises due to capital reserve shortfalls.
The decision means that the banks will spend the next three years gradually writing down their non-performing debts–instead of issuing any new loans into the economy. Defend the “zombie banks” at the expense of the real economy: This is the message coming from the ECB. The Brexit uncertainty adds to the dilemma. There is talk now in Germany about moving from the euro to a new European basket of currencies, allowing for greater effort by national governments to get their economies moving again. The rates of non-performing debt in the Southern European banks (Portugal, Greece, Spain, even Italy) is up as high as 47 percent, in the case of Greece, and well over 20 percent for the others.