Open Europe: one step behind the problem I see

Open Europe has instead called for Europe\’s banking system to be \”fundamentally recapitalised\” in a move that could cost as much as €372bn.

Ahead of crucial G20 talks this weekend, the London-based think tank has called for leaders to ditch its plans to boost the European Financial Stability Facility (EFSF) and push instead for a radical restructuring of Greek, Portuguese and Irish debt, as well as bank recapitalisation.

Yes, that\’s lovely, but that\’s one step behind the actual problem. The actual problem being, how do we get the interest rates on Spanish and Italian debt rollovers down?

For if we don\’t get those rates down then the two countries will be, as their debt rolls over, locked into paying high rates and will thus become insolvent.

Ireland, Greece and Portugal are just so yesterday as problems: remember, markets are forward looking things.

2 thoughts on “Open Europe: one step behind the problem I see”

  1. In an ideal world we shouldn’t get those rates down. It’s the last bubble – the sovereign debt bubble. Partly due to the sovereigns ill-advisedly taking on bad private debts rather than letting them go. Private debts that accumulated to excessive levels because interest rates were too low for too long. We don’t dissuade people from doing it again by keeping interest rates even lower for even longer.

    So the solution to the current problem is to create another future problem, and the way to avoid a future problem is to have a possibly very big problem now. But eventually we have to put a sock in it. Do we trust the alcoholic to keep drinking just enough for just long enough to make his detox not life-threatening, and then to not reach for all the liquor we leave lying around for months to years after he is sober? That’s what the “low interest rates” solution proposes, the “normal interest rates”, or heaven help us “leave interest rates to the market”, would naturally have a speedier and possibly fatal withdrawal.

    Sometimes I think Europe needs to decouple from the dollar rather than decoupling from itself.

  2. The rising interest rates on Eurozone sovereign debt are at least as as much due to perceived risk in the Euro itself as due to high debt levels in Spain and Italy. Those interest rates will not fall until investors are satisfied that the action being taken to ensure the future of the Eurozone is both real and effective. To my mind that will inevitably involve hard restructuring of Greek and possibly Portuguese and Irish debt, and maybe some kind of split in the Eurozone. There will be heavy losses for bondholders, but the market is already pricing in a haircut on Greek debt of the order of 65% so any institution that is actually marking its investments to market will already be taking the hit to profits.

    It’s depressing that the Eurozone banks appear to have done nothing whatsover to improve their capital positions and evidently are expecting sovereigns to support them. Personally I don’t think sovereigns should support banks: if a bank can’t raise capital in the market then it is ACTUALLY insolvent and should be allowed to fail. (I’m aware that’s a controversial view!)

    But the most dangerous thing is the political paralysis which is now CAUSING the contagion spreading throughout the Eurozone. Whatever is to be done, and however painful it is, the sooner they get on with it the better for everyone. Dithering only makes matters worse.

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