GRAPH: European banks have leveraged themselves to the hilt in parallel with the long-term trend of decreasing interest rates. Note that the process gained speed in 2002 when the ECB shifted into easy money mode like the Federal Reserve. Note that corporate leverage ex financials stayed flat. Chart courtesy Goldman Sachs (click to enlarge)
As I am still flat-bedded with a gastro-intestinal dysfunction I ask you to draw your own conclusions abuot the survival chances of the European banking sector when it will inevitably run into tighter money later this year. The dropping Euro already adds to consumer prices with gasoline prices reaching levels last seen in summer 2008 and Austrian TV announced last week that milk products will rise by 20% to 30% in June.
This will become the litmus test for the European Central Bank (ECB) as it solely has to fight inflation. Official Eurozone CPI figures receded to 1.5% in April (pdf) after reaching the threshold-level of 2% a month earlier. A widening gap between deflationist Ireland where prices dropped 2.5% YOY and Greece, where inflation rages at 4.7% are another telltale sign that nothing's well in the Eurozone and that it will become ever more difficult for the ECB to formulate a monetary one-size-fits-all policy.