New solution to European debt crisis: refinancing Europe's banks?
As the global economy founders, refinancing Europe's banks to deal with the debt crisis might be preferable to bailing out countries, experts say – and politicians are starting to agree.
The past few days have seen Europe’s leaders hectically playing firefighter to save the union’s financial system and prevent the crisis from reaching the real economy.Skip to next paragraph
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The global economy is going through the most severe crisis since World War II, Jean-Claude Trichet, the outgoing president of the European Central Bank, said in an interview on German television last night, calling on political leaders to take coordinated action. But while analysts may share Mr. Trichet’s gloomy assessment of the ongoing financial crisis in the eurozone and its vicinity, they are unconvinced by his call for unity.
European leaders have to confront not one, but several wildfires. The sovereign debt crisis engulfing Greece and several other countries – mainly in southern Europe – is now aggravated by concerns about the health of Europe’s banks, which only a few months ago were deemed safe and sound. There is disagreement within the eurozone about the design of mechanisms devised to prevent future debt crises. And there is an increasingly skeptical European population, wondering if saving the project of a common currency is worth paying the price.
Concerns about Europe's banks
A Greek default is now more likely than ever, and there is growing consensus that it might be the only way forward for the country. “Greece needs a restructuring of its debts,” says Jörg Hinze, senior economist at the Hamburg Institute of International Economics (HWWI). “In conjunction with structural reforms of its public sector – so far Athens has not shown it is serious about such reforms – and with further international aid, such a haircut [a partial write-off of debt] could help Greece get back onto its feet within five or 10 years. Without it, the country faces political, social, and economic chaos.”
A Greek default – and the example it sets for other struggling eurozone economies – would have serious consequences for Europe’s banks, though. Even though a stress test conducted earlier this year seemed to show that the majority of banks were in good health, it now appears that the capital resources they are holding may not be enough to absorb losses caused by sovereign defaults. The newly elected director of the International Monetary Fund, Christine Lagarde, was the first to warn – five weeks ago already – that European banks were up to 200 billion euros short. In the course of this week alone, firms in Italy, Portugal, and the United Kingdom were downgraded by the rating agency Moody’s.