Europe’s bad debts are a ticking bomb

Bad debts in the eurozone are a “ticking time bomb” for the continent’s economy, with the worst effects expected to be felt next year, a report has warned.

Banks’ balance sheets will contract by a record margin in 2012, further constraining the supply of credit to businesses and consumers, according to Ernst & Young, but the “real impact” of Europe’s debt crisis will not arrive until 2013.

The accountancy firm said banks will shrink their balance sheets by €1.6 trillion (£1.3 trillion) this year as the result of asset disposals and a contraction in their lending activity – a sharper decline than during the financial ­crisis.

As a result, it predicted that corporate lending will contract by 4.8pc in 2012, while consumer loans will fall by 6.6pc, which would represent the fastest pace of lending contraction on record for the eurozone.

However, next year looks even more “bleak” as the fallout from bad debts is felt across Europe, Ernst & Young’s Eurozone Financial Services Forecast said.

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