x Abu Dhabi, UAESaturday 22 July 2017

Bankers fear repeat of 2008 meltdown

Credit squeeze already under way in Europe likely to affect lending to businesses in Gulf.

ABU DHABI // Europe's financial system is in the midst of a crisis that leading bankers are comparing to the period just before the meltdown of 2008.

Bank shares in Europe fell sharply for a third day yesterday. BNP Paribas, France's biggest bank, dropped 5.2 per cent after falling 6 per cent on each of the previous two days.

Josef Ackermann, the Deutsche Bank chief executive, said conditions in Europe reminded him of September 2008, when the US investment bank Lehman Brothers failed and the world started its worst recession since the 1930s.

"We should resign ourselves to the fact that the 'new normality' is characterised by volatility and uncertainty," Mr Ackermann said at a conference this week. "All this reminds one of the autumn of 2008."

A credit squeeze is under way in Europe as banks grow more reluctant to lend to each other, which analysts say could affect Gulf lenders.

Banks are hoarding cash in anticipation of lower revenues, which could mean less money being lent to businesses. Economists at HSBC yesterday downgraded their outlook for global economic growth this year and next, foisting much of the blame on Europe.

"The eurozone is extremely worrying," said Jaap Meijer, a banking analyst at AlembicHC in Dubai. "Much more so than the slowdown in the US, because it looks like a funding crisis, and that means it will have impacts on lending."

Europe has been grappling for months with a sovereign debt crisis that has hit its banking system hard. Banks hold large amounts of government debt of financially troubled countries such as Greece, Portugal, Spain, Italy and Ireland. Many banks have been bailed out or given government injections, but the ground is still shaky.

Europe's leaders have floated a long list of possible solutions. They include further attempts to shore up banks' capital, and replacing individual national debt with European Union-backed debt. Political discord has blocked all but the most modest of proposals.

Analysts do not expect the crisis to cripple banks in the Gulf, but it could have worrying consequences if a long-term credit crunch takes hold. The region's banks are well-capitalised, analysts say, but some are still building up their cash cushions in case the global lending market becomes more strained.

"There's nothing wrong with trying to garner more liquidity in times of uncertainty," said one UAE bank treasurer. "You like to have a little more cash around you."