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Handling Europe's pain

Our banks are feeling the pain of the debt problems of Italy and Greece and so will you.

Our banks are feeling the pain of the debt problems of Italy and Greece and so will you.

NEVER mind the Greeks, beware banks bearing gifts.

Rates have dropped and dividends raised but I wouldn't be getting excited by either if I were you.

What you gain on your mortgage you'll lose on your super because of the lower profits from the compromised economic outlook that forced a Reserve Bank cut.

And, for that matter, the banks' bigger dividends haven't come from a boom in lending but a book entry that has cut the provisioning for doubtful debts.

Even adding the 30 per cent tax break from franking credits, dividends aren't much chop when the shares are sliding.

The same goes for super since your fund is bound to be chockablock with high-dividend yielding bank stocks, which might have seemed a safe way of fast-tracking returns except the risk seems to grow daily that their prices will drop more than their payout. You'll be getting less on your savings too, so by my reckoning more will be worse than better off.

It's all Europe's fault, of course. The whole continent has become a welfare state, the most egregious example being Greece, which owes 152 per cent of its GDP, putting the whole country in hock and then some.

Italy owes 120 per cent but because it's economy is much bigger - no wonder the market is freaking out - it accounts for one-quarter of Europe's sovereign debt, mostly to French banks.

Alas, the economic uncertainty and mad market mood swings are destined to drag on for years because the European banks are going to have to pass the hat around to restore capital eaten up by their increasingly worthless Greek and Italian bond holdings.

As they raise more capital they'll suck funds out of the global financial markets and push up funding costs.

But they'll also need to curtail their lending, which will keep Europe in the doldrums for years and be a drag on global economic growth.

It's a wonder banks are still subscribing to Italy's ever increasing bond issues, especially when there's another ?300 billion of them maturing next year, which will have to be rolled over and are bound to go at an even cheaper price.

Yet neither can afford the other to go under. That's why there will be a solution, either foisted on Europe by the market or, less likely, by the politicians. As Luxembourg's prime minister Jean-Claude Juncker once confided "we all know what to do but we don't know how to get re-elected once we have done it," though maybe he was being generous on the first count.

The special bail-out fund is supposed to have ?1trillion to play with. But not to put too fine a point on it, it doesn't.

Likewise, they refuse to admit Greece is broke even though it will never be able to repay its debts, tantamount to dangling bait in front of a market baying for blood, most recently that of Italy's billionaire prime minister, Silvio Berlusconi. Imagine that, it wasn't his own money that was his undoing but everybody else's.

Anyway, at some point the European Central Bank (ECB) will be forced to overlook the fact that it is illegal for it to do anything but fight inflation, something that hasn't stopped it already buying Italian and Greek bonds and going for broke, as it were.

Sadly, all banks are in this together. Ours might not have lent to Europe but they borrow from it.

Depending on when and by how much the ECB takes action, their costs will rise, or revenues fall.

Neither will be good for their share prices or your super.


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