The Euro Zone debt crisis and the situation of the European banks

Abstract

The sovereign debt crisis in Europe has deepened so far in 2011 and even more so since midyear. The reason behind this continuous deterioration is a combination of vulnerabilities in macroeconomic fundamentals (including some questionings about debt sustainability in Greece and other countries), misgivings about the effectiveness of the policy responses up to date and also the possibility of a spillover of the negative effects to other sectors and countries. The situation of the European banks is especially relevant due to their exposure to the debts of the economies in distress and to their dependence on wholesale funding. Though the analysis of the banking institutions reveals that their condition is highly heterogeneous, the current interconnection among the banks themselves and with the financial markets in general leads to higher perceived risks for the financial stability in Europe, with a potential impact at global level.

JEL classification: F01 ; G01 ; G21