Economists warn of perils in rescue of Europe's banks | india | Hindustan Times
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Economists warn of perils in rescue of Europe's banks

india Updated: Feb 13, 2012 21:54 IST
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Few would grudge Mario Draghi his boast last week that he and the European Central Bank (ECB) had prevented a disastrous credit crisis by showering banks with cheap loans in December.

But beneath the gratitude toward Draghi, the president of the central bank, lurks a fear that the easy money could simply be creating the conditions for another banking crisis several years from now.

Because of the central bank's cheap financing, some economists warn, sick banks now face less pressure to confront their problems - to clean out bad loans and other impaired assets, or even wind down operations if there is no hope of a turnaround. The ECB, they say, could inadvertently spawn a cohort of "zombie banks," burdened by nonperforming loans and assets that remain on the books.

"It's a huge bet," said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva. "If the crisis ends up well, the ECB will have pulled off a miracle. If things go wrong, then commercial banks will be in a much worse situation than they were before."

Professor Wyplosz said the central bank might be making the banking system more fragile by encouraging institutions to load up on risky assets, especially government bonds from troubled euro zone countries like Spain or Italy. Banks can use those assets as collateral for more loans from the central bank.