quarta-feira, junho 13, 2012

A New Deal essential to overcome European banking crisis

Barroso's  proposal for a new type of banking union in Europe is a major step towards overcoming the European credit crisis, but it has came up against major resistance from the national central banks such as the Bundesbank and from wholesale cross border investors which have been the major beneficiaries of the (heretofore unsucessful) bailout effort funded collectively by the ECB, the EU and the IMF.
 If at first  you don't succeed, keep doing the same thing over and over again?  Brilliant...

First, bank credit excesses and too much cross-border funding were one of the root causes of this Eurozone credit crisis, as in any banking crisis in history. The German banks were the most overleveraged and exposed of all, followed by the French and the British banks. The (im)prudent national central banks have a lot to answer for, as national "home rule" failed miserably.

Second, don't look now, but cross-border credit risks have already been pooled and mutualized as cross-border investors were able to cut their exposures thanks to the repayments funded by the collective official bail-out funds and ECB emergency funding

Third, the Bundesbank and some of the other NCBs are already funding this huge reallocation in credit exposures by allowing its TARGET2 credit balances to accumulate, to what appear to be unsustainably divergent levels. Non-Eurozone central banks are probably getting a free-ride.

Fourth, if collective bail-out funds and emergency funding can be used to repay wholesale investors (the poor down-trodden widow and orphan hedge fund managers) whose "hot money" in-and-out tsunamis are a big part of the problem, why should the same collective support not be made available for LOCAL retail depositors and LOCAL retail investors, whose LOCAL SAVINGS are THE critical element of the solution? This would help by stabilizing local bank funding, stopping capital-flight, and generating the local surplus that is a necessary, if not sufficient, condition for eventually repaying some of the excessive external debt.
Roosevelt, Franklin D.: New Deal pin, 1932

The FDIC, FEDERAL Deposit Insurance Corporation was a linchpin of the US New Deal banking legislation.

Sadly, in Europe we are still mired in Hooverism, and there's no Roosevelt in sight.

Mariana Abrantes de Sousa
 PPP Lusofonia, Algés Portugal

See  more about the New Deal banking legislation in
and more about the crisis in the PPP Lusofonia blog,
See also 

8 comentários:

What would be the worst scenario disse...

Mariana Abrantes de Sousa
Financial Consultant , PPP Lusofonia
The worst scenario for the Eurozone crisis would be to continue to misdiagnose and mismanage the intra-Eurozone financial imbalances, with Germany increasing its CAB Current Account Surplus with corresponding increases in the unsustainable CAB deficits of its Eurozone trading partners, while failing to provide confort to local savers and depositors. In the absence of restrictions on capital flows, NO bailout money will be ever be enough, if local depositors continue to stampede out of local bank deposits and take suitcases full of cash to buy real estate in Berlin.

Continuing regulatory and policy failures in protecting local savers and investors could create self-fulfilling runs on local banks.

Mariana Abrantes de Sousa

See more analysis on the Eurozone banking crisis in my blog PPP Lusofonia

PPP Lusofonia disse...

Which came first, the diverging intra-Eurozone external accounts or the hot-money capital inflows that financed the growing gaps? We may know better only after ten years and ten dissertations from brilliant ten brilliant young economists.

I guess your hypothesis may depend on whether you are more influenced by Krugman's views on the asymmetric sharing of the gains from trade due to economies of scale, or whether you are more of a monetarist, just following the money.

My personal experience from Lisbon, and as a economist and former bank officer veteran of other debt crises (Argentina and Mexico in the1980's), is that it is the huge credit in-flows (veritable hot-money tsunamis) allowed the trade imbalances to grow until they became unsustainable, by making it possible to postpone the necessary adjustments, until the whole system crashed. Only an apparent fool would turn away all the easy credit made available to Portugal by German, French and British banks and investors. Alerting to the dangers of over-borrwowing was the fastest way to get sidelined.

Unlike the recycling of petrodollar export surpluses in earlier International banking crises, which had to be invested in third countries because OPEC countries had nothing more to sell besides oil, the German export surplus continues to be invested in …financing more German exports.

Even now, as European banks are reducing their exposure to the periphery countries and traditional inter-bank funding is being replaced by ECB funding, Volkswagen Bank announced it would step up lending in Portugal… so we could import more cars! Meanwhile, Portuguese exporters are unable to meet their export orders because of the lack of basic pre-export financing, needed to buy components and to trade receibables.

Is this a problem of a fundamental and structrural lack of competitiveness, or does it reflect a severe mis-allocation of resources by the European banking system, that is, a failure of intermediation and of banking regulation? In my view, it’s moslty the latter.

I would like to believe that “periphery is not destiny”, that small fragile economies are not condemmed to persistent impoverishement at the hands of their stronger trading partners. Bu this will require a very diferent type of ecomonic integration than what has been acomplished by the Single Market and the Single Currency in the European Union. We keep doing the same things wrong, we will keep getting worse and worse results.

Not even an 8-year-old beleives that he can corner all the marbles in a winner-take-all game and still keep playing, much less take all the marbles and run.
Mariana Abrantes de Sousa, Economist
PPP Lusofonia
Portugal, 13-June-2012

Bancos eficientes mas imprudentes disse...

Note-se que em 2006, os bancos espanhois eram considerados os mais eficientes da Europa,

Agora somos obrigado a recordar que num banco é mais importante ser prudente no longo prazo do que ser eficiente no curto prazo

Read Krugman disse...

Read Krugman article about "Greece as a victim" in

BIS on cross-border credit retraction disse...

In the fourth quarter of 2011, banks headquartered in developed European economies reduced their cross-border assets by $466 billion (2.3%), the second largest decline in both absolute and relative terms since the fourth quarter of 2008.

BIS reporting banks reduced their exposures to all sectors in each of the five euro area peripheral countries.

Garantia de depósitos EU já disse...

Europa não tem um mas sim 4 presidentes, cuja proposta de uma união bancária está a ser discutida esta semana:

Eis os 4 pilares do plano dos 4 presidentes, Barroso-Draghi-Juncker-Rompuy, para criar uma união bancária europeia, a fim de salvar a Moeda Única e o Mercado Único
• instituição de regras para o setor bancário a nível da UE, nomeadamente requisitos comuns, embora flexíveis, em matéria de capitalização bancária obrigatória
• criação de uma única autoridade europeia de supervisão bancária com poderes de controlo direto sobre os bancos que operam em mais de um país e os bancos de grande dimensão, com vista a assegurar a aplicação eficaz das regras estabelecidas e a gerir o controlo dos riscos
• definição de regras comuns para prevenir falências no setor bancário e intervir quando um banco se depara com dificuldades financeiras a fim de evitar futuros planos de reestruturação financiados pelos contribuintes
• instituição de um sistema único de garantia de depósitos para proteger os depositantes titulares de poupanças e de investimentos na UE e reforçar, assim, a confiança no sistema bancário


PPP Lusofonia disse...

Barroso-Rompuy plan put aside in Eurozone summit:
Allowing bank recapitalizations to take place without the involvement of the sovereign is a recognition of the benefits of the Iceland model, focused on protecting local depositors and allowing speculative cross-border investors to do their own debt workout, which has proved to be more realistic and sustainable than the Irish model of guarantees-for-all.

While explicitly rejecting the mutualization of EU debt, on the borrowing side, German creditors and investors are busy taking advantage of the extended non-default period to mutualize exposures on the credit side, securing reimbursement thanks to the availability of bailout and ECB funding.

Curiously, despite the huge sums made available by official sources to ward off default and to make possible the current retreat phase of the tsunami of wholesale hot money, why is no official European money made available to guarantee and confort local retail savers and depositors in the distressed countries?

There will be NO solution to the external credit crisis, NO balance of payments adjustments, and NO repayment of the excessive external debt, without promoting local savings and without stabilizing local bank deposit funding.

Euro para que te quero disse...

O Euro é apenas uma das causas da crise divergência e desintegração da Eurozone, mas pode ser o maior impedimento à solução.