A survey of European banks gives you an idea about a sharp decrease in lending capacities of the banks. It's time to comprehend the reasons behind such trouble at raising money. Considering the crisis the Euro zone faced over the years, the policy makers need to reconsider some of the critical things threatening the economic growth. Economic output is contracting in 9 of the 17 nations that use the euro. European banks are weak and unable to finance the nations that require credit finance. This is the major reason behind failure to have proper economic recovery and fixation of financial problems.
Failure to repay and re-finance the government debt results into need of the third party into the picture. European sovereign debt and financial crisis make it difficult for some of the countries to repay the government debt alone. The debt problem remains one of the prime considerations, communicating the failure of the government to limit its expenditure. The rising debt levels around the world result into downgrading of government debt. The economic analysis presents clarified observations. The structure of the Euro zone is another factor, where we see monetary union without fiscal uniformity. It seems difficult to manage situation, when there is one common currency and differences exist on account of different taxation and regulatory framework. The banks own considerable amount of debt, threatening the solvency of the banking system. Increased fear of credit crisis makes it difficult for the banks to have appropriate financial decisions. When the stock market news indicates upcoming recession, the condition becomes graver. The future possibility of market decline can put constraints on the banks to control their financial decisions. Obviously, they put restrictions on the amount and to whom to lend the finance to, when they find trouble in raising additional finance. So, to avoid the risk of default, they have tightened their lending standards, resulting into strict control on the economic factors.
Some of the reasons of the European debt crisis can be listed as globalization of finance, easy credit conditions, risky lending and borrowing practices. Real estate bubble, international trade imbalances, and economic slowdown add to the present economy failures. It seems that only the fundamental changes in the banking system can help Europe recover from the constantly faced credit and debt crisis. Again, low confidence of the banks can be listed as another factor that affects on lending capacities of the banks. The European banks are valued by the stock market performance at present, which is normally less than the book value of the shares. Such valuation does not seem valid in the changing business scenario. The factors like political stability, economic issues, and currency valuation do have much to say about the European banks' trouble in raising money. Hence, it is difficult for the banks to raise money from usual commercial sources. Failure to which, there is considerable increase in the cost of liability. Bailing out the countries facing severe solvency problems make it worse.