Euro Zone Faces More Uncertainties

Spain continues to be hit by the debt crisis as it faces yet another challenge to its financial system. Bad loans held by Spanish banks rose to an 18-year high in May, triggering concern that the costs of covering default would weaken the financial system of the country. Bad debts as a percentage of total lending climbed to 8.95 percent, from 8.72 percent in April, according to the published data by the Bank of Spain. It was also reported that lending and deposits in the country’s banking system declined. “The economy is into negative territory and unemployment is still going up so in that kind of environment you can only expect non-performing loan formation to continue to tick up,” said Inigo Lecubarri of Abaco Financials Fund in London in an interview with Bloomberg Television. Investors’ concern that bad loans would pile up at a time like this, where economic recovery is suppressed by the debt crisis and unemployment nearing 25 percent, are resulting to the rise in borrowing costs which already reached 6.91 percent yesterday. In February 1994, bad loans climbed to the highest level at 9.15 percent, and the recent bad loans ratio is already nearing that mark. Meanwhile, German Chancellor Angela Merkel’s comments added to existing European woes as she said that the EU leaders have still more work to do. According to a media report, the comments of Merkel were posted on the website of her Christian Democratic Union party. “We have not yet shaped the European project in a way that we can be sure that everything will turn out well, we still have work to do.” She however expressed optimism that they would succeed in overcoming the debt crisis. With the still bearish atmosphere surrounding the Euro region, the outlook for the Euro Zone economy is seen to further weaken.