Tag Archives: Bank recapitalization

EU banking union a product of the euro crisis but also its solution?

bankia-protestThere is a dirty little secret at the heart of the euro crisis and it concerns Europe’s banks. Many politicians and much of the media have focused their attention on the role sovereigns – particularly in southern Europe – had in triggering uncertainty and economic instability in the single currency area but the part banks played in laying depth charges at the euro’s foundations has been largely absent from public debate.

Yet, most places you look, eurozone banks have left their mark through a mixture of risky practices, undercapitalization, and over-exposure to government bonds and the US subprime market. Ireland is the most obvious case, where taxpayers have been asked to stump up about 70 billion euros to bail out reckless and troubled lenders. Spain has just asked for a 40-billion-euro bailout for its banks, which fuelled an unsustainable property boom through cheap credit in the previous years. The most prominent example of the short-termism and entangled interest that led to this imprudent lending was Bankia, formed by the merger of seven savings banks, or cajas, in 2010.

Bankia has so far absorbed 19 billion euros of taxpayers’ money, shed 50 billion euros of assets as part of a restructuring and cut 6,000 jobs. French-Belgian bank Dexia found itself in a similar situation. France and Belgium have so far spent about 15 billion euros rescuing the lender and provided up to 85 billion euros in state guarantees after it was caught short by its reliance on short-term financing in 2008 and then to Greek debt in 2011.

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Anyone for debt tennis?

“Breakfast with Samaras. You would never guess he’d won Wimbledon so many times,” tweeted @Queen_Europe, a fake Angela Merkel account, on Friday morning as the German Chancellor met Greek Prime Minister Antonis Samaras. The New Democracy leader is known to like a game of tennis but he is certainly no Pete Sampras.

In fact, he admitted that his tactics at this summit were limited; a serve and volley game that lacked any forehand or backhand flourishes.

“I prefer to be defensive on this issue,” Samaras said in response to questions about the longstanding matter of Greek debt sustainability. The Greek leader said his aim was first to conclude negotiations with the troika, secure the all-important bailout tranche of 31.5 billion euros and then consider all other matters.

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A changing tide to lift Greece

A rising tide lifts all boats, they say. The changing tide in Europe produced by the eurozone leaders’ decisions in Brussels on Friday could certainly help give Greece, sinking deeper into trouble over the last three years, the buoyancy it needs to survive.

Although still far from finalized, the outline deal that emerged somewhere around 4 a.m. in the Belgian capital paves the way for banks in eurozone countries to be recapitalized directly from the European Stability Mechanism (ESM), to which all members contribute money.

If this scheme applies to Greece, there are two key benefits. Firstly, it would reduce the public debt substantially. The current recapitalization of Greek banks involves 48 billion euros being lent to the government via the EFSF and this being distributed to the lenders via a public fund, the HFSF. This means 48 billion euros are being added to the national debt, whereas if the money is lent directly to the banks by the ESM, Greece would avoid this extra burden. Even after the debt restructuring (PSI) in March, Greece is still expected to owe just over 160 percent of its GDP at the end of the year. A direct recapitalization from the ESM would reduce this debt by about 25 percent of GDP. It would also slash the amount Athens pays in interest each year.

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The ties we don’t see but can’t ignore

President Karolos Papoulias was correct to stress to party leaders the unusually large amount of savings being withdrawn from Greek banks over the past few days but this also caused some unnecessary arm-flapping, a practice which always obscures people’s view of what is important.

Papoulias told party leaders on Monday that 700 million euros had been withdrawn from Greek banks on Monday. Banking sources told the Financial Times that about 5 billion euros had been withdrawn since the end of April. Savings disappearing from Greek banks is nothing new. Deposits have fallen from about 240 billion euros in 2009 to some 170 billion now. However, the rate at which money is being withdrawn at the moment is a cause for concern.

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