I know that it is weekend. But I do not think there is a rule saying "weekend commentaries should be entertaining, not serious." Can weekends be time of mediation or an opportunity to leave behind hullabaloo of life and take a top view on the environment? Why not? This is our intention for today.

Nowadays, people all around the world have awkward feelings. Is it because of the spring or what? Nowadays everyone seems to be only too glad to agree that the worst part of the period has passed. At least this is what they say. If you take a general look at the figures, they do not seem bad at a glance. On the other hand, for instance there exists a rush which is not so sweet. This week German government announced preparations on things to be done about non-performing loans. Though the result was not so favorable, the efforts were concentrated on the right issue. European banks had a problem. The latest surprise of the European Central Bank (ECB) was that it announced last week the facility to provide liquidity to banks via purchase of covered bonds, a type of asset backed securities (ABS). The discussions within the ECB maintained that the facility should be expanded to cover also financing bonds. There is a problem in Europe. Let us see what this problem is.

The origin of the global financial crisis was the United States of America. As the transparency problems of the ABS, which is an invention of American financial markets, scaled up the counterparty risk over the global financial system, transactions nearly came to a halt. A significant confidence problem occurred. For all of us, the emerging problem was fundamentally "American job". Why was that so? It was so because the weight of the securities on the core of the problem in European markets was limited.

Let us check two figures: First; the share of issued direct debt securities in US national income is 168 percent while the same share for Europe is only 81 percent. These figures pertain to 2007 year end. So, how do European companies different than American companies finance their activities? It is quite simple: Through bank loans. While the share of bank loans in national income is 145 percent in Europe, the same share for the USA is 63 percent. These figures also pertain to 2007 year end. What does this mean? It means that in Europe, corporate sector financing through securities is of less importance than in the USA. Moreover, it also means that European capital markets are less efficient as less important. Note that this detail is also important. It also means that making financial innovations is harder. Are not these enough? Then, here is another conclusion: In this case, balance sheets of banks in Europe contain less toxic waste that leads to global crisis. After all, balance sheets of European banks, different than US banks, contain higher level of loans. Let this be the second conclusion we reached. If you noticed, the figures above necessitate a third conclusion: When compared to the USA, European banks are of more importance considering the finance of corporate sector. It is also possible to put it this way: Banking system constitutes the core of the industry in Germany and Italy. Industrialization theses of Alexander Gerschenkron for North Italy were also constructed around this framework.

Now, let us proceed with the main issue. Banking crisis emerged in the USA as the toxic assets in balance sheets of US banks could not be separated from profitable investments. "What do you have in your balance sheet?" game eventually resulted in a confidence crisis. This source did not lead to a big banking problem in Europe. This was enabled in two ways: First, as Trichet says with pride, while liquidity needs of the US banks were directly met by FED; ECB did not have to fulfill that function. European banks continued heavily funding each other. Interbank market within the euro area composed of 16 member states continued to function predominantly. European banks started to get in grieve recently while LİBOR has been normalizing. Second, in Europe unlike the US, neither stress tests were carried out nor huge amounts of funds were transferred to the banking sector.

Then, what happens to the European banking system nowadays given that a series of measures geared to confidence crisis have been taken at the initial phase? Why is Europe lagging behind considering the measures to be taken to tackle global banking crisis? Is there a new problem or is Europe lagging behind as it somehow fails to make a decision because of incompetence? I wished the reason was solely the latter; however, it seems that the reason is the former. It seems that there exists a new problem.

The thing we must carefully monitor is: corporate sector, cash balance of which was damaged due to domestic and foreign demand that came to halt, facing payment problems putting pressure on the banking sector. And it seems that this condition will apply for a while more. What did we say in this context? We said that "If corporate sector of a country is troubled, banking sector of that country cannot be healthy". As a matter of that, it is not healthy.

Why is this issue important? First, bank loans are important for corporate sector financing in Europe. If there are no loans, there is no production. Second, loans are of great importance also for balance sheets of banks. If there is a loan related problem, it means that the hearth of the banking system is troubled. Third, it the problem is not solved immediately, Europe cannot experience any recovery at all.

Fourth, what did ECB President Jean-Claude Trichet already said on May 7? Did not he say "Serious contraction in 2009 and gradual recovery in 2010 "? This might be hard to achieve under the new circumstances. Fifth, for Turkey, recovery in Europe means recovery in global demand, or vice versa.

It is wise to monitor the condition carefully and not to build high hopes.

This commentary was published in Referans daily on 16.05.2009