The Eurozone banking system is insolvent, but no one wants to admit that, at least officially.

Instead, the ECB has rules in place that would force banks to deal with bad loans. That too may go by the wayside.

Under political pressure, especially from Italy, the ECB Mulls Shelving Rules Tackling the Eurozone's Bad Loans Pile.

The European Central Bank, after suffering a political backlash, is considering shelving planned rules that would have forced banks to set aside more money against their stock of unpaid loans.

The guidelines, which were expected by March, had been presented as a main plank of the ECB’s plan to bring down a 759 billion euro ($930 billion) pile of soured credit weighing on euro zone banks, particularly in Greece, Portugal and Italy.

The ECB was now considering whether further policies on legacy non-performing loans (NPLs) were necessary “depending on the progress made by individual banks”, an ECB spokeswoman said.

Central Bank sources told Reuters that if the rules were scrapped, supervisors would look to continue putting pressure on problem banks using existing powers.

Andreas Dombret, the outgoing Bundesbank director in charge of banking supervision, said in an interview published on Monday that the ECB’s credibility was at stake.

“One cannot say that NPLs are one of the biggest risk for the European banking sector and a top priority and then fail to act,” he told Boersen-Zeitung.

But the ECB has received push-back on a separate set of guidelines on loans that sour in the future from several members of the European Parliament, particularly from Italy, and lobbyists. These give banks seven years to provide for new bad loans that are backed by collateral and two for those that are not.

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ECB Message

Seven years is not enough time to deal with bad loans totaling $930 billion.

Italy is damn glad that Mario Draghi, an Italian, heads the ECB.

Credibility

Talk of losing credibility is a joke. The ECB has no credibility to lose.

Market Reaction

Italian banks rallied on the news.

US Dollar

Anyone so sure the US dollar is guaranteed to drop need only look at the setup in Europe to have at least some doubts.

At this stage, it is impossible to predict the "winner" in the race to the bottom. A currency crisis awaits.

Mike "Mish" Shedlock

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