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’
Satyajit Das writes the Das Capital Column in the Independent. He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant to banks, fund managers, governments, companies and regulators around the world. He is also the author of Traders Guns and Money and Extreme Money as well as a number of reference books on derivatives and risk-management, which double as 'door stops'. He became a banker because he wasn't good enough to be a professional cricketer, but would give up finance if anyone offered him a job as a cricket commentator or allowed him to pursue his other passion- wildlife (he is the co-author with Jade Novakovic of In Search of The Pangolin: The Accidental Eco-Tourist). He lives in Sydney, Australia.
Tuesday 12 November 2013
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.
- 1 Paris attacks: Do not call Charlie Hebdo killers 'terrorists', BBC says
- 2 Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
- 3 UK weather: Snow to fall in the coming week with sub-zero temperatures to last until early February
- 4 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 5 The enemy within: People who hear voices in their heads are being encouraged to talk back
Paris attacks: Do not call Charlie Hebdo killers 'terrorists', BBC says
Rowan Atkinson to sell £10 million McLaren 'supercar' he crashed into a tree and a lamppost
UK weather: Snow to fall in the coming week with sub-zero temperatures to last until early February
Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
Howard 'Mr Nice' Marks reveals he has inoperable cancer: 'I've had an incredible life'
Nigel Farage: NHS might have to be replaced by private health insurance
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
George Galloway condemns 'racist, Islamophobic, hypocritical rag' Charlie Hebdo at freedom of speech rally
iJobs Money & Business
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...