A € for your thoughts(5): Barry Eichengreen on European Banks and sovereign crisis

In this interview to Der Spiegel, he also mentions the US economy, and how he fears that 2012 will be to the US what 2010 was for Europe. However the part that interests me is the beginning, where he analyses Europe. His emphasis is on the banks, and the fact that they are not in good shape.

Mr Eichengreen maintains that a breakup of the Euro-area is very unlikely, assuming that “at their summit in March, the member states face up to some unpleasant truths. Plan A has failed. Now they have to switch to Plan B. They must stop attempting to combat the crisis in Greece and Ireland by forcing these countries to pile more debt onto their existing debts by saddling them with overpriced loans”. Moreover, he argues that the onus of the crisis is on the banking sector, which financed the fiscal extravaganza of the last 20 years and is now left in the cold holding junkish bonds. To this extent he puts the price tag for rescuing French and German banks at 3% of Franco-German GDP.

He goes on to argue that a hair-cut to Greek and Irish EU loans would help and that the stress tests should include an analysis of the liquidity conditions of the banks. I understand from the article that the latter is his biggest concern. His fear of capture of the national regulatory bodies the EBA delegates the stress tests to by national banks is such that he goes on to argue that what would put his “mind at rest more would be if the responsibility for carrying out the stress tests went to the European Commission. National regulators are too susceptible to pressure from the regulated”. This is clearly an issue of credibility of the stress tests, which could have repercussions for their result.

I particularly enjoyed two comments he made. First, that “the present bailout attempts have never made sense. Essentially, all Germany and France want to achieve with these measures is to protect their own banks from collapsing”. Second, and still on the topic of the rescue packages, the comment where he says that “it will probably be easier for Chancellor Angela Merkel to persuade German taxpayers to save their own banks than to fork out billions for Greece again. Especially since, with a haircut on Greek debt and measures to strengthen banks, it should be possible to draw a line under the crisis — and preventing it from spreading to Spain”.

As a conclusion, I’ll leave you with these words from the author.

“Europe needs to strengthen its banks! Greece lived beyond its means, but in Ireland and Spain it is the banks that are the problem. The euro crisis is first and foremost a banking crisis.”

“Europe’s banks are in far greater danger than people realize. Most people now understand that last year’s stress tests didn’t tell us much. The tests were a token gesture and lacked realistic scenarios. They completely ignored the liquidity risks that banks could face.”

“My main concern is that Europe will choose a middle path again, for example by making the interest and terms on loans to Greece and Ireland more tolerable. Europe’s leaders wouldn’t be wrong in doing that, but it would fall far short of what is needed to save the euro. The result would be more wasted months for Europe.”

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