Forget Bailouts, Watch Out For European Bank Bail-Ins: Fitch

European banks need bail-ins rather than bailouts of fresh capital, as the European Central Bank’s liquidity operations come to an end, according to ratings agency Fitch.


Bail-ins - where banks convert debt on their books into new equity rather than looking for fresh capital elsewhere – could expose banks’ creditors to greater risk. However, they would avoid the taxpayer being exposed even further to banks’ failure.

“There’s a balancing act going on between trying to make banks much safer and making sure that huge amounts of taxpayers’ money doesn’t go into bailing them out next time around,” Bridget Gandy, managing director and co-head of EMEA financial institutions, Fitch Ratings, told CNBC’s “Squawk Box Europe.”

“They’re trying to make sure there’s a way that banks can resolve their problems by bailing in senior creditors. Trying to introduce legislation like that could send creditors running for the door – so this is where the balancing act could come in,” she warned.

The European Central Bank’s two mass liquidity injections, in December and February, helped buoy markets earlier this year, but concerns about the long-term consequences of the European debt crisis remain.

There are also worries that banks are storing up the cheap loans provided by the ECB rather than using them to stimulate the wider economy.

European banks started off the first-quarter earnings season on a downbeat note this week, with Deutsche Bank and Barclays both hit by one-off charges.

“There’s been enough money put into the system, it’s just going straight back to the central banks,” Gandy said.

“The liquidity in the inter-bank markets has gone. Deleveraging has already occurred in the inter-bank market and the ECB has effectively replaced it.”

Many believe the euro zone entered the second phase of a double-dip recession last year, and is expected to suffer from slow growth for several years – while many of its economies are undergoing austerity programs which could stifle growth.

“There’s so much uncertainty about economic growth and what to invest in, people who have got money are holding on to it, and those who haven’t, haven’t got anyone who’s lending to them,” Gandy said.

“German and Nordic banks are awash with liquidity but can’t actually find anyone to lend out to.”

There is also the possibility that Moody’s review of European banks’ ratings, due in early May, could result in some downgrades.

Spanish banks are believed to be particularly at risk because of their exposure to the country’s real estate sector. The Spanish property market has stalled and many believe it has further to fall before property values reach their bottom.