Financial turmoil will top the agenda when leaders from the European Union (EU) member states gather in Brussels for their annual spring summit later this week.
Six months after European financial markets were victimized by the US sub-prime mortgage market crisis, EU leaders were tasked to find a way out of the persistent turbulence, which has become a major downside risk to the economy of the 27-nation bloc.
In summer 2007, European financial markets experienced a sudden and turbulent re-assessment of risk by investors, as the default rate on US sub-prime mortgage loans increased significantly.
Since the financial markets across the Atlantic are deeply intertwined and interdependent, sub-prime losses in the US quickly transmitted themselves via the securitization and credit derivative markets to many corners of Europe and the rest of the world.
Many European financial institutions, including some big names like UBS, Credit Suisse and Fortis, suffered huge losses resulting from mortgage-related investments.
It was estimated that world financial institutions have so far registered a total loss of 215 billion US dollars related to the US sub-prime mortgage crisis. Europe was the second biggest victim after the US, with an estimated loss of 78.5 billion US dollars.
However, the list of European banks afflicted by the crumbling US housing market is still growing. Such uncertainty made financial institutions reluctant to lend, resulting in credit squeeze, which forced the central banks to pump large quantities of liquidity to the banking sector.
The problems have spread to other segments of the financial system, such as commercial real estate securities, bond insurers and highly leveraged private equity loans, which banks continue holding, given the lack of outside investor interest for buying them.
