Banco Santander, S.A. (SAN), Deutsche Bank AG (DB): A Health Check on the Global Financial System: Can Europe Get Out of Its Jam?

Who is paying the price?

European corporations are decimated by liquidity shortage. On top of the depressed demand conditions, the banks’ reluctance to give the small and medium-sized enterprise sector a breath of fresh air is causing it to starve. IMF’s estimations suggest that as much as 20% of bonds and loans issued by European corporations are “unsustainable” while credit supply has contracted by 5% since the outbreak of the crisis. Portugese companies appear to be the most heavily indebted with their debt amounting to almost 50% of their assets. The chart below is worth a thousand words:

Source: Global Financial Stability Report, IMF

So, what does this mean? Major European companies will need to continue clamping down ondividends, capital expenditures, and general expenses if they wish to exit risk territory. Acompany that first comes to mind is French-based Alcatel Lucent SA (NYSE:ALU). The stock has been hovering around the $2 mark for quite some time now while the once prominent provider of mobile and broadband networking services has been struggling to turn things around.

Over the past couple of years, it has been applying a cost-reduction program aiming to survive from a failed merger and a sluggish economic environment. A glimmer of hope appeared on the horizon a couple of months ago, when it sealed a $2.1 billion debt refinancing deal with Credit Suisse Group AG (NYSE:CS) and Goldman Sachs Group, Inc. (NYSE:GS). This deal provided the struggling telecom-equipment maker with extra time and flexibility to continue its much needed restructuring process. Alcatel-Lucent reports first quarter of 2013 earnings on Friday. Analysts average estimations suggest a bottom-line loss of $0.14 per share.

The Foolish bottom line

Cyprus’ bailout fiasco – under which there will be heavy losses on bank deposits of more than €100,000 – was a wake-up call for European decision makers. Europe has to deal with the fragility of its banking sector once and for all.

From where I stand, it appears as if there is no end to Europe’s mayhem. Private debt overhang needs to be reduced to complement the clean-up of bank balance sheets. But without a solid banking system capable of triggering a pick-up in domestic demand by increasing credit supply, how do you expect European companies to live up to their role?

The article A Health Check on the Global Financial System: Can Europe Get Out of Its Jam? originally appeared on Fool.com.

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