These days, the economic difficulties of Europe tend to dominate distress news, whether the discussion involves sovereign risk or the increasing focus on Eurozone bank risk. Concurrently, investors who are comfortable with debt, equity and restructuring—also known as distress investors or value funds—are preparing to invest heavily in the region. While it may be obvious to some, the links between sovereign insolvency and bank insolvency have spawned yet another debate over the efficacy of having a monetary union without fiscal authority, as is the case with the European Monetary Union (EMU). Significantly, however, no one disputes that the recovery in Europe will require large amounts of capital, and that that capital is unlikely to come from the Eurozone banks. So the question arises: How is the capital going to be replaced?

Press focus on the regulatory status of banks has created the impression that clearing (if not exiting) the non-core and nonperforming loan assets of the Eurozone banks is the near-term objective. Based on current trends, Eurozone banks will only continue lending, if at all, within their domestic markets while retreating from other “non-core” markets. But the coverage also suggests opportunity, and the arrival of new, non-euro bank lenders for corporate borrowers. Even if currently over-leveraged situations are right-sized through restructuring activities, there is still a need for business capital. As Eurozone banks shrink their balance sheets by selling assets and engaging in “run-off” activities, the capital needs of European businesses may require the substantial involvement of non-bank lenders and bank lenders outside the Eurozone. Even the acquisition of financial assets may be leveraged, but on a far more conservative basis.

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