EGX ends in red on August 20    Egyptian pound weakens against US dollar on August 20    Contact Reports Strong 1H-2025 on Financing, Insurance Gains    Egypt expresses 'deep dissatisfaction' to Netherlands over embassy attack    Global pressure mounts as Gaza fighting intensifies and death toll surges    Egypt, India's BDR Group in talks to establish biologics, cancer drug facility    AUC graduates first cohort of film industry business certificate    At TICAD, Egypt's education minister signs pacts with Casio, SAPIX    Madbouly invites Japanese firms to establish industrial zone in SCZONE    Cairo, Tokyo sign LOI to expand educational cooperation, support for persons with disabilities    Egypt to tighten waste rules, cut rice straw fees to curb pollution    Al-Sisi meets Qatar PM, Bahrain security adviser to discuss Gaza crisis, regional stability    Egypt's FM, Palestinian PM visit Rafah crossing to review Gaza aid    Egypt prepares unified stance ahead of COP30 in Brazil    Egypt recovers collection of ancient artefacts from Netherlands    Egypt harvests 315,000 cubic metres of rainwater in Sinai as part of flash flood protection measures    Egypt, Namibia explore closer pharmaceutical cooperation    Fitch Ratings: ASEAN Islamic finance set to surpass $1t by 2026-end    Renowned Egyptian novelist Sonallah Ibrahim dies at 88    Egyptian, Ugandan Presidents open business forum to boost trade    Al-Sisi says any party thinking Egypt will neglect water rights is 'completely mistaken'    Egypt's Sisi warns against unilateral Nile measures, reaffirms Egypt's water security stance    Egypt's Sisi, Uganda's Museveni discuss boosting ties    Egypt, Huawei explore healthcare digital transformation cooperation    Egypt's Sisi, Sudan's Idris discuss strategic ties, stability    Egypt to inaugurate Grand Egyptian Museum on 1 November    Greco-Roman rock-cut tombs unearthed in Egypt's Aswan    Egypt reveals heritage e-training portal    Sisi launches new support initiative for families of war, terrorism victims    Egypt expands e-ticketing to 110 heritage sites, adds self-service kiosks at Saqqara    Palm Hills Squash Open debuts with 48 international stars, $250,000 prize pool    On Sport to broadcast Pan Arab Golf Championship for Juniors and Ladies in Egypt    Golf Festival in Cairo to mark Arab Golf Federation's 50th anniversary    Germany among EU's priciest labour markets – official data    Paris Olympic gold '24 medals hit record value    A minute of silence for Egyptian sports    Russia says it's in sync with US, China, Pakistan on Taliban    It's a bit frustrating to draw at home: Real Madrid keeper after Villarreal game    Shoukry reviews with Guterres Egypt's efforts to achieve SDGs, promote human rights    Sudan says countries must cooperate on vaccines    Johnson & Johnson: Second shot boosts antibodies and protection against COVID-19    Egypt to tax bloggers, YouTubers    Egypt's FM asserts importance of stability in Libya, holding elections as scheduled    We mustn't lose touch: Muller after Bayern win in Bundesliga    Egypt records 36 new deaths from Covid-19, highest since mid June    Egypt sells $3 bln US-dollar dominated eurobonds    Gamal Hanafy's ceramic exhibition at Gezira Arts Centre is a must go    Italian Institute Director Davide Scalmani presents activities of the Cairo Institute for ITALIANA.IT platform    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



Europe's Banks, Europe's crisis
Published in Daily News Egypt on 11 - 07 - 2010

BRUSSELS: Europe continues to constitute the epicenter of Act II of the global financial crisis, which has now mutated into a sovereign-debt crisis within the eurozone. How could this happen when, at least on paper, all problems had seemingly been resolved during May's extraordinary EU summit meeting, which created a European Financial Stability Facility (EFSF) and ensured total funding of close to $1 trillion?
Those May promises have, in the meantime, been made more concrete. A “special purpose vehicle” (SPV) has been established in Luxembourg, and can already count on hundreds of billions of euros in guarantees from member states.
If all the resources promised (€750 billion, including financing from the International Monetary Fund) were to be used fully, the EU could fully refinance all distressed countries (Portugal, Spain, and Ireland) for a couple of years. Moreover, the European Central Bank has shown willingness to buy government (and private) bonds if it judges that the functioning of the market has been impaired.
But this official financial firepower has left markets unimpressed. Spreads on Spanish government bonds continue to creep up, and are now higher than before the announcement of the EFSF. And there are ominous signs of tension in the interbank market, as more and more banks, reflecting weak confidence that the stability of the system has been restored, would rather deposit their money at the ECB than lend to other banks.
The explanation is simple: the problems that underlie the crisis (the precarious state of Greek public finances and that of the Spanish real estate sector) have not been solved, though they should actually be easily manageable in a pan-European context. Greece represents about 2% of the eurozone economy; even if it defaulted on its public debt, and the recovery value were only 50%, the losses would be about €150 billion, or just 1.5% of eurozone GDP.
The problems in Spain are likely to be somewhat larger, although official estimates of the losses in the Spanish banking system amount to only €100 billion. But the real problem in Spain might well lie elsewhere: the exposure of French, German, and other banks to Spain's real-estate sector.
Many loans to Spanish developers will have to be written off. But, even in the worst case, the combined losses of Spanish and other banks in the Spanish real-estate sector should not exceed €300 billion, or about 3% of EU GDP.
So, the real question is why problems of manageable proportion on Europe's periphery are paralyzing the eurozone's entire banking system. After all, one would not expect the United States' banking system to collapse just because there was a housing bubble in California and the state of Michigan (similar in size to Greece) became insolvent.
A key reason why Europe's financial markets remain nervous is that, officially, there is no problem. Officially, Greece does not have a solvency problem, and restructuring of its public debt is not an option. Similarly, in Spain, the official line is that the domestic banking sector is well capitalized.
The first rule of dealing with financial-market turbulence should be to acknowledge the truth and scale of the problems at hand. Greece's experience has shown that pretending that problems do not exist can result in a self-reinforcing spiral of increasing risk premia and declining confidence.
In this respect, the publication of the results of “stress tests” conducted on the EU's 100 largest banks, promised for the end of July, is a clear step forward.
But there is a second and more disturbing reason why financial markets remain unsettled: large swathes of the European banking system remain vastly undercapitalized. According to ECB statistics, eurozone banks have about €20 of liabilities (including interbank debt) for every euro of capital and reserves. This implies that for every capital loss of one euro lurking in some bank, there will be about €20 of doubtful debt.
Even a worst-case scenario for Greece and Spain would imply losses of €450 billion at most. The funds mobilized so far under EFSF (€750 billion) would be amply sufficient to deal with all of this – provided that these potential losses are clearly identified and the necessary funds earmarked to deal with them. Yet this is not the approach that is being followed.
Instead, European funding will be used only to bail out governments, which in turn need the money to bail out their banks. But, given the 20:1 liability-capital ratio in the banking sector, this approach implies that the funding requirements will become astronomical: compared to a €450 billion bill if potential losses remain undisclosed and dispersed, €9 trillion in debt guarantees would be needed to ensure the stability of the eurozone's banking system.
In short, rigorous stress testing of eurozone banks (followed by mandatory recapitalization) would require much less public funding than would continuing to extend blanket guarantees to everybody.
Europe cannot escape the crisis in its financial markets until it fixes its banks. Unfortunately, Europe's policymakers have twice let themselves been misled by politically convenient views of the crisis — first in 2007/2008, by supposing that the financial contagion came from the US, and nowadays, by blaming reckless fiscal policy in the southern eurozone.
But the real problem is that the EU's banking system is so weakly capitalized that it cannot take any losses, while also being so interconnected that problems in one country quickly put the entire system at risk. Until the banks' balance-sheet problems are dealt with decisively, financial markets will remain on edge.
Daniel Gros is Director of the Centre for European Policy Studies. This commentary is published by DAILY NEWS EGYPT in collaboration with Project Syndicate (www.project-syndicate.org).


Clic here to read the story from its source.