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Posts Tagged ‘Jeremy Warner’

From Jeremy Warner:

How come European banks have got so much of the stuff [sovereign debt]? Well ironically, this is one lending decision gone wrong that the banks cannot be blamed for. In response to the original banking crisis, regulators ordered banks substantially to increase their liquidity buffers. Government bonds are generally viewed as the most liquid and least risky assets to hold, so that’s where the money went.

That these regulatory obligations also helped governments fund their ever growing deficits is by the by. In any case, nowhere is the law of unintended consequences more in evidence than in financial regulation. By seeking to address the last crisis with greater liquidity buffers, regulators succeeded only in sowing the seeds for the next one. A banking crisis that transmogrified into a sovereign debt crisis now shows every sign of transmogrifying back into another banking crisis.

Plus this:

It is not impossible that the euro zone will be able to muddle along a bit longer: Greece may have done just enough in its latest plan to cut spending and raise revenues to receive the next tranche; the German parliament may be coaxed into approving the July decisions; the revamped EFSF may then be able to take up the bond-buying task from the ECB and a problem may be found to the problem of Finland’s demand for collateral. Then what?

The situation is so dire that any bit of bad news would easily cause another collapse in the markets. So at the same time as Germany is talking of giving up on Greece, it is also talking about redesigning the euro zone. Done right, a new European architecture may ensure that such a crisis does not recur.

But as Barry Eichengreen points out, the problem is now, not tomorrow. It will take years to renegotiate and ratify new treaties, even assuming there is no blockage of the sort that beset the Constitutional Treaty. But the euro zone faces critical days and weeks.

Germany will likely kick Greece out of the eurozone, which will render its debt worthless.  But the banks have only written down a portion of Greek debt on their balance sheets, hardly mark-to-market.  With a unprecedented level of funding coming due during next year’s first quarter, the ECB has a daunting task ahead.  It’s not pretty.

Read the whole thing.

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