Can a ship float and be underwater at the same time? If it has been financed by a European bank, the answer may be yes. A glut of ships, and slack demand for shipping in the weak global economy, have reduced the value of cargo ships. According to some estimates, as many as half the cargo carriers on the high seas today may no longer be worth as much as the debt they carry — putting them underwater, in financial jargon.

Large vessels that might have sold for about $150 million new in 2008 fetch about $40 million today, according to Nicholas Tsevdos, a shipping specialist at CR Investment Management, which helps banks deal with distressed assets. And with cargo fees near record lows, many vessels are not earning enough to make debt payments, either.

As European leaders agonize about how to rescue Cyprus banks, the formerly obscure world of ship finance is a reminder of how much cleanup still lies ahead for the region’s banks.

The growing fear is that some lenders, almost all of them in Europe, have yet to confront the scale of potential losses from an estimated $350 billion in loans made to the shipping industry.

“Many banks are still shackled by the leftover effects of the crisis,” Christine Lagarde, the managing director of the International Monetary Fund, told an audience in Frankfurt this week, without identifying any specific assets. “This is the weak link in the chain of recovery.” She urged banks to take a harder look at their problem loans.

Whether the risk from shipping loans is serious enough to put another torpedo into the euro zone financial system is hard to say because of a glaring lack of detailed information about banks’ portfolios of shipping loans.

Andreas R. Dombret, a member of the executive board of the German Bundesbank who is responsible for monitoring financial stability, said he thought the shipping crisis, while serious, did not pose a broad threat to the euro zone. “It’s not a concern for the stability of the financial system,” he said in an interview. “It’s not systemic.”

But he and other bank overseers are stepping up pressure on financial institutions to address their problems. Shipping is “a substantial regional and sectoral risk in the banking industry,” Mr. Dombret warned at an industry gathering in Hamburg last month. It was one of the few times a bank overseer of his stature had expressed concern about the shipping problem.

Under pressure from regulators, local governments that own most of HSH Nordbank in Hamburg said on Tuesday that they would raise their guarantees for the bank to 10 billion euros ($13 billion), from 7 billion euros ($9 billion).

Though only a midsize bank, HSH is the biggest lender to the shipping industry, with more than $39 billion in outstanding loans. The announcement, by the City of Hamburg and State of Schleswig-Holstein, amounted to an admission that losses from shipping were greater than earlier estimates.

Source: Reuters