As investors dumped stocks Friday on both sides of the Atlantic, a growing suspicion that Europe's banks are on shaky ground offered more evidence that the struggling global economic recovery is in trouble.
BERLIN — As investors dumped stocks Friday on both sides of the Atlantic, a growing suspicion that Europe’s banks are on shaky ground offered more evidence that the struggling global economic recovery is in trouble.
The increasing mistrust of Europe’s banks is threatening to drag down the continent’s sluggish economy and prompting new worries for U.S. financial firms that do business with their European counterparts.
The concerns about the health of Europe’s financial firms are making it harder for them to raise money. In turn, they are under pressure to charge more for loans they offer to businesses and consumers on the continent. The resulting credit crunch has echoes of three years ago, when Wall Street’s meltdown prompted fearful banks and businesses in the United States and elsewhere to stop lending each other money, choking off the economy’s lifeblood.
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The trouble in the European banking sector comes as policymakers are struggling to address the continent’s spreading debt crisis and stalling economic growth. New indicators out this week, for instance, showed that growth in Germany, long the region’s economic dynamo, had slowed nearly to a standstill.
Deutsche Bank analyst Matt Spick said that perceived weaknesses in European banks, coupled with the economic slowdown, is creating a “toxic funding crisis” that could leave the financial firms strapped for cash and forced to curb lending.
In European trading, bank stocks continued to drop Friday, after even steeper losses a day earlier. The French bank Société Générale plunged nearly 16 percent in the past two days while two other French banks, BNP Paribas and Crédit Agricole, were down about 11 percent and 9 percent, respectively, over that period. Germany’s Deutsche Bank lost 7.5 percent in the past two days, and Britain’s RBS was off more than 16 percent.
More broadly, the Stoxx 50, an index of blue-chip companies in the 17-nation eurozone, finished Friday down 2.15 percent. In the United States, the Dow Jones industrial average was off 1.6 percent for the day while the Standard & Poor’s 500, a wider market index, lost 1.5 percent.
As European banks lose trust in one another, the rates they charge one another for loans have been rising.
And U.S. money-market funds, a crucial source of dollars that European banks need to operate, have pulled back from lending them money, pushing up the prices those banks must pay, analysts note. At least one European financial firm recently tapped the last-resort dollar loans offered by the European Central Bank, spooking global investors.
At the heart of the problem are hundreds of billions of dollars in government bonds issued by heavily indebted countries from Ireland to Italy and bought by banks throughout the 17-nation euro currency zone.
At the time of purchase, the banks viewed the bonds as virtually risk-free investments. The banks were not required to set aside any money as a buffer in case of losses on the bonds and considered them easy to use as collateral in raising other funds.
But the government bonds have turned out to be Europe’s version of subprime mortgage loans. No one is sure who owns them or how many they own.
And amid Europe’s spreading debt crisis, no one knows what the bonds will be worth. Holders of Greek government bonds are already being asked to accept a 21 percent cut in the value of their holdings as part of an international effort to bail out Greece. Investors now worry they could be asked to accept a similar haircut on the more popular bonds of larger countries such as Italy and Spain if they need to be rescued.
Any crisis in the European banking system could quickly hit the United States. If those banks run into trouble, it could affect major U.S. money-market funds, considered a safe place for investors to put cash. Major European banks have also been active investors and lenders in the U.S. economy.