- Associated Press - Thursday, December 15, 2011

PARIS — A slew of bad news on European banks has fueled fears about their ability to survive the debt crisis and raised the prospect of a new global credit crunch.

Five large lenders saw their credit ratings downgraded this week, and a sixth, Commerzbank, saw its stock plunge on speculation it might need more government support. As uncertainty grows that a fellow lender might collapse, banks are cutting back on lending to each other for fear of not getting their money back.

When that credit between banks dries up, loans soon stop flowing to businesses and households, stunting economic growth. On Thursday, the rates banks charge to lend dollar to one another remained at their highest level since September.

The heart of Europe’s problem is bad government debt — a phrase that until recently was nearly an oxymoron. Government bonds of wealthy countries were long considered the safest of safe assets.

But as the debt loads of European countries soared, investors began to wonder if their governments could pay back the loans, so they began charging more to extend those loans. That only fed a vicious circle: The more governments had to pay to borrow money, the more trouble they had paying it back. Eventually, Greece had to admit it wouldn’t repay all of its loans — and that shattered confidence in other eurozone countries. Would Italy renege? Would Spain? France?

European leaders have been struggling to reassure investors that they will pay back their debts and to work out a way to make sure they never again grow so large. But in the meantime, the bonds are all still out there, their value has plunged, and much of them sit in Europe’s banks.

In addition, banks are struggling to raise more cash for their rainy-day funds, their stocks are plunging and they’re facing higher borrowing rates.

“European banks remain the nexus of most European problems,” analyst Huw Van Steenis wrote in a Morgan Stanley research note.

It’s the banks that “transmit” the debt crisis to businesses and consumers, he argues. Because what were traditionally their safest assets — government bonds — are now among some of their most suspect, banks are struggling to secure the loans they need to fund their day-to-day operations. Until the debt crisis erupted, those government bonds typically served as collateral for loans from other banks.

When banks stop lending to one another, they also stop lending to the “real economy”: homeowners, consumers, businesses. The European Central Bank’s lending survey in October, the latest available, showed that standards for lending to businesses tightened significantly, and that banks expected them to tighten even further through the end of the year.

The banks also told the ECB that they were finding it increasingly hard to get their hands on loans. The percentage of banks saying their access to markets was tightening skyrocketed in the October report. They expected that situation to improve a bit toward the end of the year but to remain difficult.

Even that grim assessment may have been overly rosy: The rates banks charge each other to borrow dollars overnight has been steadily increasing in recent weeks. On Thursday, the rate known as LIBOR was 0.1505 percent — a high matched once last week but not surpassed since late September.

The ECB has stepped in to lend to banks when no one else will. As a measure of how bad things have gotten, the ECB supplied banks with a total average of €615.3 billion ($801 billion) in ready money to operate their businesses over the three months to Nov. 8. That’s up €99.1 billion ($129 billion) from what banks needed in the previous three months.

David McHugh in Frankfurt and Pallavi Gogoi in New York contributed to this report.



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