Banking Crisis

European and US investors were unfazed after the Tuesday announcement from two of Europe's largest banks -- Swiss bank UBS and Germany's Deutsche Bank -- of enormous first quarter losses. There was a sense that things couldn't get much worse and that the bad news could actually set the beleaguered banking industry down the road to recovery.

But the celebrations might prove premature. German banks are estimated to have about 200 billion euros ($312 billion) in bad credit on their books, according to a study by Ernst & Young released Wednesday.

World-wide, US loan defaults that sparked the crisis could cause losses in the financial industry of up to $600 billion, according to Spiegel magazine, citing an internal study by German financial supervisory body BaFin.

The 16-page paper was a worse-case scenario which BaFin stressed might not happen. Thus far, financial institutions have publicly admitted to losses of $295 billion.

German banks were believed to be exposed to about 10 percent of the total, according to the federal regulator.

Calls for transparency

European Central Bank (ECB) governor Axel Weber also warned that more bad news is sure to come.

"The crisis of confidence is not over yet. As long as the price decline in the US property market continues, further turbulences have to be expected," Weber said in an interview with the German newspaper Bild, which appeared Wednesday.

European Union Economic and Monetary Affairs Commissioner Joachin Almunia echoed the ECB concern that further bad news could come.

"We do not yet have an overview of the level of losses, banks do not yet inspire trust," Almunia said in an interview with the Frankfurter Rundshau newspaper.

Weber reiterated the need for more transparency in the banking sector, calling on banks which have taken great risks to "disclose their losses."

Grim outlook for WestLB

One such disclosure came Wednesday. While no one expected there to be any good news from the troubled German WestLB bank, the news was even worse than expected.

WestLB announced that the global financial turmoil and stock trading losses would leave it 1.6 billion euros ($2.5 billion) in the red for 2007. The bank had previously estimated a loss of 1 billion euros.

"WestLB has seen one of the most difficult situations in its history," said bank head Alexander Stuhlmann.

On Monday, the German state of North-Rhine Westphalia promised a 5 billion euro bailout for the regional bank. The state holds a stake of around 38 percent in WestLB and regional state-owned savings banks hold more than 50 percent of the bank's shares.

The bank has also announced plans to cut 1,350 jobs as part of a plan to turn the business around and possibly prepare it for a sale or merger.

Extent of exposure murky

The WestLB announcement comes one day after two of Europe's biggest banks, both of which had extensive exposure to the US subprime crisis, announced major first quarter losses.

Deutsche Bank said it would write down 2.5 billion euros and Swiss bank UBS said it would write down 12 billion euros. The bad news pushed up both banks' stock prices, as investors hoped the worst of the crisis might soon be over.

Since the US market for high-risk mortgages collapsed last year, lending on international credit markets has dried up. Banks have been unable to determine their own exposure to potential losses and therefore have become wary of lending to one another.

International financial officials have repeatedly called on banks and other financial institutions to come clean on their losses, which would restore market confidence.

For Germany, a muted upswing

While the US seems to be headed towards a recession, Almunia said he believes that the "European economies are better prepared than others against the crisis."

Weber, who is also the president of the Bundesbank or German central bank, remained confident regarding the German economy's outlook.

"The upswing is continuing," Weber told the Bild. "Above all, that refers to the 'up', just the 'swing' dwindles away a bit."

The Bundesbank forecasts that the German economy, Europe's biggest, will grow by a little more than 1.5 percent in 2008.

Weber said he does continue to have long-term concerns about inflation. Euro zone inflation accelerated to a provisional 3.5 percent year-on-year in March, the highest level since the single currency was launched in 1999.

"It is important for the further upswing that the purchasing power of the people is preserved," Weber said.