Signs of Stress Grow at European Banks
By Peter Coy
Europe’s debt mess has been festering for so long it sometimes feels more like a chronic condition than a life-or-death crisis. But as negotiations to prevent a Greek default drag on, investors and lenders increasingly are concerned that a banking crisis could break out, dragging down the Continental economy before Greece even has a chance to default. On Sept. 21 the International Monetary Fund estimated that Europe’s banks face more than $400 billion in losses and said that weak banks need to raise capital quickly.
The core of the problem? Some European banks are in peril of losing what they need most: cheap funding. Banks profit by borrowing money for short periods— rolling over some of their debt as often as nightly—to fund long-term loans at higher rates. As concern about their exposure to a sovereign default grows, European banks are paying more to borrow. Doubt about banks can quickly become self-fulfilling if worried depositors and lenders yank out their money. Remember: Lehman Brothers went from O.K. to dead in less than a week in 2008, when hedge funds and other banks concluded that the company couldn’t pay its bills.
The second paragraph states that when people and corporations that deal with banks lose trust in them,
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