Is It a Bailout for Greece or for Euro-Zone Banks? July 6, 2010Posted by Yilan in EU, European Union, Yunanistan.
Tags: EU, Euro bank, Greece
Fiscal indiscipline has shaken the euro zone to its foundations. But another failing appears to be taking the euro zone’s debt crisis into another worrying phase: the weakness of many of the region’s banks.
Since the crisis started, most of the blame for the crisis has fallen on profligate governments such as Greece. Much less attention has been directed towards a different cast of characters: those governments that have failed to take charge of their banking systems.
Chief among the villains here: Germany, which has been preaching fiscal austerity across the euro zone but has done little to shore up its own weak banks. Responsibility for German banks lies with the financial watchdog Bafin, which analysts say is one of Europe’s weaker bank regulators, and the Bundesbank, whose head Axel Weber has been a leading critic of steps taken so far to head off the crisis.
“Germany is coming across so high and mighty on many of these issues but where was the Bundesbank on the banking issue?” asks Richard Portes, professor of economics at the London Business School.
There’s strong evidence that the €110 billion ($134 billion) bailout for Greece was driven in part by the aim of avoiding hundreds of billions of dollars of losses at banks in France, Germany and elsewhere that held Greek government bonds. “The bailout of Greece was primarily a bailout of the banks,” says Nicolas Véron of the Bruegel Institute in Brussels. The €750 billion package that followed on May 9 for other, weaker members of the euro zone was also aimed at averting a dislocation of the region’s interbank market. Jean-Claude Trichet was widely quoted as telling euro-zone leaders they faced a “systemic” crisis. Mr. Véron suggests that euro-zone governments missed a giant opportunity after the financial markets calmed down in early 2009 to strengthen the region’s banks.
“If the banking system had been strengthened and cleaned up in late 2009 and early 2010, then it might have been possible to let Greece restructure its debt in March or April,” he said. Portugal could also have been allowed to default because banks would have been secure enough to take losses.
Now, he says, governments “are less able to take on the banks than they were a year ago.”
Mr. Véron says national bank supervisors “are unwilling to acknowledge the full extent of their massive oversight failures of the past decade.” Meanwhile, the explanation for a lack of action is that “Political leaders, including those in France and Germany, are deeply captured by national banking establishments… Insidiously, the same leaders simultaneously adopted a virulent anti-finance, anti-market rhetoric, which makes it all the more difficult to explain to their voters how the banking system can be restored to soundness.” Banks argue that higher capital requirements, if imposed now, would lead them to curb lending, which would stifle economic recovery.
One official in Europe who is very close to these issues, speaking on condition of anonimity, says euro-zone banks have done little over the last year to strengthen their financial positions. Figures from Dealogic back up the claim: euro-zone banks have raised $4.4 billion in new capital so far this year after $27.0 billion in the whole of 2009. U.S. banks meanwhile have raised $14.4 billion this year and $113.2 billion in 2009.
The official says banks “have been playing a game of chicken with the authorities,” failing to strengthen their finances in the expectation that, if matters got worse, they would be bailed out again. It’s a game, he says, they now appear to have won thanks to €860 billion in sovereign debt bailouts, an extension of the European Central Bank’s six-month repurchase facility, purchases by the ECB of government bonds from banks, as well as a renewal of the U.S. Federal Reserve dollar-swap lines with European central banks that will help any U.S. dollar funding difficulties.
While this should stave off an immediate banking emergency, it has done nothing to stem the underlying problems of the euro-zone banking systems or to ease uncertainty over the health of some of its weaker banks. That’s why, analysts say, interbank lending rates have recently risen—because banks are again worried about counterparty risk—and why many have chosen to build up precautionary liquidity by increasing deposits at the ECB.
The need to deal with this uncertainty explains why pressure is growing for euro-zone governments to carry out transparent stress tests—as the U.S. did last year—with a view to increasing the capital cushions of those banks that need it.
The latest to join this refrain, echoing quieter pressure from the U.S., is British Treasury Minister Mark Hoban. Saying the interventions by governments and the ECB “were in large part due to severe strains in the banking system,” he said: “A genuine, rigorous stress testing exercise is urgently needed to answer questions around [bank] solvency in severe market conditions.”
The results and methods of the tests should be transparent, he said. “Urgent action should be taken with respect to any institution failing the stress test. Only this way can we restore true stability and confidence to this sector in the near-term.”
Trouble is national authorities will resist stress tests if they believe the results will show widespread weakness among banks that could in turn further frighten the financial markets. But until they carry out the tests, proponents argue, there will remain doubts over even the region’s stronger banks.