A Plan to Address Europe’s Trillion-Euro Problem

Euro note
Picture source: Reuters.

EU finance ministers are set to adopt an action plan to address nearly €1 trillion of bad loans  weighing down the balance sheets of primarily southern European banks, according to a draft proposal obtained by Handelsblatt.

Under the plan, member states would set up national asset management companies to administer bad debts. The European Commission, the EU executive, will develop a blueprint for these asset management companies, often called “bad banks,” by the end of 2017. The blueprint will lay out EU-wide rues on capital requirements, management structures and the amount of assets bad banks can hold.

Financial institutions in Portugal, Italy, Greece and Cyprus have strained under a mountain of bad debt since the 2008 financial crisis. In Portugal, bad loans make up 19.5 percent of bank balance sheets; in Italy, the figure is 15.9 percent. Though bad loans are concentrated in southern Europe, the associated risks are a burden on “the entire economic and financial system of the European Union,” the finance ministers warn in their proposal.

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