Satyajit Das: The weakness of the European Central Bank’s policies will be revealed all too soon

Economic View: An IMF member thinks Greece’s forecasts for its debt and economic growth are ‘delusional’

Europe’s policy options in dealing with its problems, when the crisis re-emerges, are increasingly limited.

Further writedowns to reduce debt to sustainable levels, as in Greece and Cyprus, is difficult.

The European Stability Mechanism (ESM), European Central Bank, International Monetary Fund and European central banks now hold more than 90 per cent of Greece’s outstanding debt. The ECB and national central banks have substantial loans to eurozone central banks and banks respectively secured over the bonds of beleaguered countries.

Further debt writedowns, providing relief for the borrowing nations, would result in immediate losses, ultimately impinging on taxpayers in countries such as Germany.

The ECB’s Outright Monetary Transactions, which allow purchase of unlimited amounts of the debt of eurozone nations, has been hailed by its president Mario Draghi, self-effacingly, as the “most successful monetary policy measure undertaken in recent times”.

Details of the yet to be used programme remain opaque and its legal basis uncertain. It will be politically difficult for countries such as Italy and Spain to ask for assistance, as it requires a formal request and agreement to strict guidelines. If they are forced to seek assistance, then it will be under such extreme conditions and market pressures that ECB intervention may be too late.

The banking union was intended “to break the vicious circle between banks and sovereigns”. However, bank exposure to sovereign debt has increased. As at August 2013, more than 10 per cent of Italian banks’ total assets were sovereign bonds. Spanish banks’ holding is 9.5 per cent and Portuguese banks’ holding is 7.6 per cent.

Eurozone bank claims on the public sector range between 10 to 40 per cent of national GDP. European banks own around €700bn of Spain’s government bonds and €800bn of Italy’s. They also have significant exposure to Greece, Ireland and Portugal.

The key elements of any banking union are deposit insurance and a centralised recapitalisation fund.

Germany remains opposed to a eurozone- wide deposit insurance scheme. Additional financial resources for recapitalisation remain unclear. Claudia Buch, a member of the German Council of Economic Advisers, told the Frankfurter Allgemeine that bank recapitalisation would be carried out under “international control and national liability”, and highlighted the fact that peripheral nations do not have the capacity to support their banks.

The banking union is an inadequate supervisory mechanism for a small number of eurozone banks, maintaining the pretence of action and progress and allowing all governments to save face.

The scope of the €500bn ESM is limited, as it relies primarily on capital contributions from four countries: Germany, France, Italy and Spain. While there is no binding legal provision for remaining ESM members to increase their support, if Spain or Italy needs assistance then the contingent commitment of the remaining countries, especially France and Germany, may have to be increased.

Further IMF assistance may be difficult. Significantly the Latin American representative did not approve the release of the most recent tranche of IMF funding for Greece, on the basis that forecasts for its debt and economic growth are delusional and there is significant risk of loss.

History suggests that European governments and the ECB will be tested, revealing the weaknesses of key policies.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
The Doctor and Clara have their first real heart to heart since he regenerated in 'Deep Breath'
TV
News
people
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
News
The official police photograph of Dustin Diamond taken after he was arrested in Wisconsin
peopleDownfall of the TV star charged with bar stabbing
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?
Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

Finally, a diet that works

Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced