By: Catherine Boyle: There is growing concern among policymakers and analysts that the true extent of European banks’ debt problems is being masked. Sir Mervyn King, Governor of the Bank of England, became the most high-profile policymaker to date to warn of the dangers of banks putting off foreclosures in a speech Tuesday night.
His stern warning to U.K. banks that they need to drop the “pretense” that some of their bad debts will be repaid was coupled with the statement that they have “insufficient capital” to deal with losses which have remained undeclared.
Essentially, what seems to have happened is that banks across the euro zone have put off foreclosures on weak businesses – a process known as forbearance. This has been enabled by low interest rates across the region and rescue packages which have injected unprecedented amounts of liquidity into the banking system and helped keep struggling economies afloat.
The scale of forbearance is hinted at in relatively low rates of company insolvencies.
In the U.K., despite the recession, insolvency rates are similar to 2002, when the economy grew by 1.6 percent, according to government figures.
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Greece’s problems have been well flagged – yet just five Greek companies were declared insolvent in 2011, the year it was forced to seek a bailout from international lenders, fewer than in 2007, when its economy was still growing. This persists across the euro [EUR=X 1.2968 -0.0003 (-0.02%) ] zone, with the weakest economies sometimes experiencing its lowest insolvency rates.
In 2011, the number of insolvencies per 10,000 companies was lowest in Greece, Spain, Italy and Portugal, according to calculations from Creditreform.