Crisis 2.0? Banks Skeptical Despite Signs of Economic Recovery

Germany's economy is growing. Global exports are booming. The euro is recovering. What's not to like? Plenty, according to a survey of German banks. Fully 60 percent fear that the euro crisis will worsen and jeopardize economic growth.

A survey of German banks has found that the majority fear that the health of global financial markets is getting worse.

A survey of German banks has found that the majority fear that the health of global financial markets is getting worse.

The good economic news, it would seem, just keeps on coming. The euro lately has been flouting all predictions of its premature demise and, at $1.27 per euro, is at its highest level since May -- well above its $1.19 low seen a month ago. Furthermore, with the global economy showing signs of life, exports are booming and the German economy is growing.

Already, most major economic think tanks in Germany have revised upwards their 2010 growth forecasts for the country's economy. On Thursday evening, Finance Minister Wolfgang Schäuble followed suit. "We have a realistic chance that growth will reach 2 percent this year," he said.

And yet, skepticism remains rampant. Schäuble himself emphasized on Thursday that "the economic crisis has not yet passed," and a quick look at how European bank managers see things seems to confirm his caution. According to the semi-annual "Bank Barometer" survey carried out by Ernst & Young in Germany, which was released on Thursday, only 39 percent of the 120 banks surveyed feel that the situation on the financial markets will improve in the next six months. In December, 65 percent thought it would.

Sixty percent now worry that the European debt crisis and concurrent difficulties that have struck Europe's common currency will endanger Germany's recovery.

"Credit markets continue to harbor great distrust against some euro-zone countries. As long as this distrust persists, turbulence will continue," Claus-Peter Wagner, head of Financial Services at Ernst & Young Germany, said in the press release accompanying the report. "The unresolved debt crisis in the euro zone hangs like the sword of Damocles over recovery."

Waiting for the Stress Tests

Even the International Monetary Fund has soured slightly of late. Whereas the IMF had earlier forecast 1.5 percent growth for the euro zone in 2011, a new prognostication released this week now anticipates just 1.3 percent growth.

So who is right? The optimists or the pessimists? Jens Boysen-Hogrefe, from the Kiel Institute for the World Economy thinks that the banks are overreacting. "Such negative expectations assume that countries like Spain and Portugal have such large structural problems that reforms don't have a chance of working," he said. But Boysen-Hogrefe disagrees. "The chance is great that they will overcome the crisis," he says.

For the moment, though, it seems unlikely that jitters over Europe's financial health will calm much before July 23, when the results of stress tests on major EU banks are to be made public. The tests are to reveal how 91 major European banks, representing 65 percent of the European banking sector, would cope with another economic downturn.

European Central Bank head Jean-Claude Trichet on Thursday tried to spread optimism about the looming stress test results, saying that the ECB has been "convinced since the very beginning that transparency has its virtue, and that it is good that the market ... can see exactly what is the result of those tests." He also said that the need for the ECB to continue buying government bonds from debt-laden euro-zone countries appears to be diminishing.

For the moment, at least, it would appear that the markets agree with him. European stocks have been ticking upwards for days. Potentially even more encouraging, Spain's central bank this week was quickly able to raise €3.5 billion on financial markets this week -- with an interest rate only slightly higher than a similar bond offering on May 6.

cgh -- with wire reports


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