In its latest Financial Stability Review, The European Central Bank has good news and bad news.
First, the good news. The ECB cut its estimate for cumulative write-downs on euro-area banks’ securities portfolios in 2007-10 by €43bn versus its forecast in December. As it happens, a brighter outlook for much-maligned CDOs contributed the most to this revision.
And now, the bad news. The ECB reckons that write-downs on loans in 2007-10 will be €5bn larger than previously estimated, thanks largely to a worsening picture for commercial property mortgages. Banks in the euro area will write down €123bn on sour loans this year and €105bn in 2011, the ECB predicts.
What’s more, given the “adverse feedback” between public finances and bank balance sheets, the risk of further deterioration in euro member states’ fiscal situation means that “the upside risks to the estimate of potential future write-downs seem to exceed the downside risks,” according to the ECB. As an article at the parent site argues, “the recent improvement in large euro-area lenders’ performance could prove only a temporary respite before sovereign fiscal concerns usher in another bout of stormy weather.”