Geithner’s eurozone warning about “cascading catastrophe” is close.
Two weeks ago the US Treasury Secretary said something remarkable. “The threat of cascading default, bank runs and catastrophic risk must be taken off the table,” Tim Geithner warned the eurozone at the IMF Annual Meetings.
These threats are very much still on that table, right now. In fact, the near-nationalisation of the Franco-Belgian bank Dexia should really be the final wake up call.
Dexia had to be given assistance back in 2008 when the credit crunch first began. Now its back in the firing line – the problem is the losses it could sustain on its Greek loans. The French and Belgian governments today forced to guarantee its immediate funding. The likely long term solution – it will be broken up – the good bits sold, leaving behind a “bad bank”.
It all sounds very similar to what happened in 2008 in Britain. The fear is that Dexia is the first of many. The problem, that in 2011, the same epic transfer of banking risk from banks to states via government bailouts, will simply not be possible.
In fact there’s something of a pass-the-parcel of risk from banking sectors, to sovereigns, back to banks, and possibly back to sovereigns again.
At the core of this is Greece. It increasingly appears that the German view around sharper debt reprofiling, implying losses of 30, 40 or even 50 per cent+ for the bank holders of Greek debt (instead of the 21 per cent currently expected) is becoming the consensus. Loose but purposeful talk from the European financial ministers’ summit in Luxembourg seemed to suggest this.
But it is amazing to be showing leg on this without having a durable solution for the banks exposed to Greek debt. In Luxembourg, the Chancellor George Osborne expressed acute concern that the eurozone’s banks needed to be dealt with “now”. The only bit of strong leadership from the EU finance minister meeting was a concrete decision to not decide next week on a further €8bn tranche of Greece’s bailout. The decision will now been made in November, when Greece faces running out of cash to pay wages and pensions.
Yet more can-kicking. And all the while the risk of a catastrophic financial incident rising. The Geithner moment is here.
There are 7 comments on this post
Faisal,
It looks like the “ultimate stress test” is iminent. Now we find out which banks are healthy and which are not. Now, also, we find out how much us serfs will need to pay for the mistakes of our masters.
Does this not mean that the French banks which are most at risk from Greek Debt are about to be hit hard – creating a French banking crisis. France cannot afford to bail out its banks and guarantee a stabilisation fund.
Perverse
David Cameron shows “leadership” today by exhorting Britons to repay their debt, Britons who are daily more fearful of losing thier jobs and being unable to pay current bills for basics like food, rent, mortgage, fuel bills etc. And who benefits if ordinary people repay their loans and credit cards? Not factories and shops which will suffer even further drops in demand for their business and have to lay off even more workers but the banks who lent ordinary people excessive amounts in the first place…although not as much as the huge sums the banks lent to weaker European nations in the good times and which they fear they’ll lose when the crash comes. Cameron’s pious call for good housekeeping from poor Britons is another sign of where his real loyalties and concerns are – propping up his friends in the banks and hedge funds. Surely this is a recipe for an even deeper recession. What about real leadership in reining in the banks and regulating their excesses now, not in 2019.
Cameron still doesn’t know the difference between a ‘deficit’ and a debt.
The UK doesn’t have a debt crisis. Because UK national debt is still low relative to our income. Much lower than Germany’s debt, for example.
Our problem is that Banks have to anticipate the bad debts they expect in a stagnant economy. That cuts Bank profits to zero with no Corporation tax to pay. That’s why we have a ‘deficit’. Somebody should tell Lord Snooty!
A growing economy has a better credit rating than a stagnant one. And miles better than a shrinking one.
Recovery ended when Osborne introduced his budget in summer 2010. Since then we’ve stagnated with more and more bad debts & unemployment that drag down future tax revenues. [future because tax revenues lag a year behind Corp Tax receipts].
With a 24% devaluation of the £, we really ought to be growing. But our Government doesn’t understand how growth arises from spending in the shops. Not savings schemes.
Perhaps Billy Bragg could write a new song: ‘things can only get worse’.
One thing that makes me very curious, not to say very angry, is why national governments (i.e. taxpayers!) are being called upon to bail out the banks AGAIN.
We are always told that the first group of people that private businesses must satisfy are their shareholders, by the business making increased profits and thereby paying healthy dividends to their shareholders (i.e owners!).
But when a bank is facing loses, as in the case now with German and French banks particularly being exposed to the loans they made in the past to Greece, who is expected to step in and rescue them? Not the shareholders or the Directors (who benefit from generous share allocations as part of their enormous remuneration packages), but the jolly taxpayer, in the form of government bail outs.
The old adage about ‘if you owe the bank £100, it is your problem; if you owe the bank £1 million, it is their problem’, needs updating to suit the present times. ‘If you owe the bank £100, it is your problem; if the banks are owed £1 million by a sovereign country or through other instances of their own dodgy or misguided lending, it is also your problem because as a taxpayer, your government will pick…