OMGI’s Johnson: Eurozone periphery faces ‘long living death

Banks in the eurozone periphery face years of misery trying to shift bad debt, according to Old Mutual Global Investors'(OMGI) Christine Johnson.

The manager of the £484m Corporate Bond fund (pictured) said in contrast to the UK and US, eurozone countries had failed to rein in the worst excesses seen in 2008.

“Spanish banks are looking most like the financial version of Lindsey Lohan,” she said.

“The intentions seem to be good, if frequently having to be enforced by the courts, but under the surface there are still a host of unresolved issues.

“With unemployment hitting 27% in Spain and bad loans on a steady upward climb, the chances of another round of recapitalisation are rising. Superficially, Spain and Ireland’s property-driven boom and busts have a lot in common.”

Spain’s property market has so far only fallen 20% since pre-crash highs, compared to 40% in Ireland.

“If Spain’s housing market gradually slides as far as Ireland’s there could be another €24bn of capital needed,” Johnson said. “That is nearly one and a half times the entire annual profit of the Spanish banking system.”

Italian banks were also “in denial”, the manager added.

“Bad loans are accelerating and provisions against delinquency are low by historical standards and low relative to other banking systems. The reason is that profitability is just not high enough to allow more to be put aside. The model is already being stretched to the limit.”

 

This article was first published on Investment Week

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