European banks, assuring investors they can weather thesovereign debt crisis by selling assets and reducing lending, maynot be able to raise money fast enough to prevent government-forcedrecapitalizations.

Banks in France, the U.K., Ireland, Germany and Spain haveannounced plans to shrink by about 775 billion euros ($1.06trillion) in the next two years to reduce short-term funding needsand comply with tougher regulatory capital requirements, accordingto data compiled by Bloomberg. Morgan Stanley predicts that amountcould reach 2 trillion euros across Europe by the end of next yearas banks curb lending and sell loans and entire businesses. A lackof buyers and the losses lenders face on loan sales are makingthose targets unrealistic.

“Asset sales are impractical in the current environment,” saidSimon Maughan, head of sales and distribution at MF Global UK Ltd.in London. “Every bank is selling, and no bank is buying. It justwon't work. Beyond that, the magnitude of the cuts the banks aretalking about is nowhere near the likely required amount ofdeleveraging. They need to reduce hundreds of billions more toadjust to the new world order. There has to be arecapitalization.”

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