Sell-off, close down or take into public ownership. These are the options facing Europe's financials. There is no comprehensive US style package for buying up toxic debt and no prospect so far that one will emerge over the horizon to re-liquefy balance sheets. Is that a good thing?
In the opinion of Giles Keating, our guest host this morning and Head of Research at Credit Suisse, this is a failure of European cooperation. The lack of coordinated action to relieve the banks of their bad debts will only leave us in a longer, more protracted, period of credit-rationed economic anemia. The market appears to be pricing off the prospect for aggressive policy response, and it is not getting that in Europe.
The US Treasury has addressed the financial distress as a systemic threat to the US banking system and economy. In Europe our politicians are still of the view that this is a story of isolated poor lending practices and that when a few of the bad apples are closed or nationalized then stability and the status quo will be restored. Are they right?
How you answer seems to depend on how thick you like your hair shirt.
The US plan is either a blight on the purity of the capitalist system for purging and cleansing; or a necessary evil for allowing an orderly reconstruction of the financial system. There are few undecided.
The experience of previous banking crises is that a bad bank/good bank model is invariably part of the solution.
Hive of the good parts of the business and quarantine the bad parts – selling on what can be sold and slowly winding down the parts that can’t. Public funds always play a role in the solution. Right now the question in the US is really not whether the US taxpayer makes a profit or not from the toxic debt, but whether not using public funds to lighten the banks' load will result in a more harmful economic outcome for the US economy. So far so Japanese – the difference will be in the speed and strength of the intervention as to whether a decade or so of economic drift can be avoided.
Europe’s politicians don’t have such clear economic insight.
If they did, surely the finance ministers would be meeting now to discuss who puts in how much money and what the terms of engagement should be for an intervention fund. Forget the central banks – it is now too late for the credit markets for the central banks to be cutting base rates or opening special liquidity windows. What use to put a plaster on a man with a broken leg?
The markets are trading on confidence, and confidence is shot.
When there are no buyers left in the market and the market is too important to be let to fail then the government must step in. European governments could restore considerable confidence by stepping forward and showing US-style commitment to spend what it takes to do the job. As any cold war academic will tell you – sometimes it's just the implied threat of action that forestalls the crisis.
What we have now is asymmetrical asset markets – be it property or stocks.
There are many sellers and few buyers. Just the suggestion of a rescue fund in the hundreds of billions of euros might be enough to change the balance. It might also mean very little more public money has to be spent to nationalize Europe's reeling financials.
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