European banks set to cut lending in US, Europe: Dexia bank

15th September 2011, Comments 0 comments

European banks will have to cut back hard on their activities in the United States and will probably have to cut lending in Europe, because of the eurozone crisis, Dexia bank warned on Thursday.

Some European banks, notably in France, are having great difficulty in borrowing dollars for their US activities because investment funds are reluctant to provide them with finance on concerns the debt crisis could weaken banks.

At French-Belgian Dexia bank, a world leader in lending to local authorities, vice chairman Pierre Mariani forecast "an extremely harsh contraction of activity by European banks in the United States" at a meeting with French business journalists.

Mariani also warned that lending would also be cut back sharply in Europe as banks implemented new rules and reduced risk to strengthen their balance sheets amid tensions on short-term money markets.

"Everything is in place massively to organise a credit contraction," Mariana said referring to Europe.

Mariani said that financing in dollars was still readily available, but that European banks would have to review their US business models. Low-margin lending to major US corporations "was over", he said.

Mariani also expressed doubt that a public entity could effectively replace private banks as the main financiers of local public bodies such as towns and municipalities.

Dexia is a world leader in packaging financing for local authorities.

Local government borrowers are having increased difficulty in raising money on financial markets hit by the debt-crisis and new regulations on banking and financing, in a context of concern about general economic slowdown.

In France, to face this scarcity in cash, several local leaders are asking the state to create a public agency which could take over in place of private banks such as Dexia.

Mariani said that an agency would face the same liquidity problems as a private bank unless it was guaranteed by the state, in which case the entity would violate fair competition rules.

© 2011 AFP

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