The idea that taxpayers should be expected to bail out Europe’s ailing banking system is “ridiculous” and does not work, one expert told CNBC’s “Squawk Box Europe” Tuesday.
Spain asked for a bailout for its banks – the country has stressed it is a loan – at the weekend. Cyprus has also hinted it will likely need a bailout, possibly as soon as this month, as its banks are highly exposed to Greece, which faces crucial elections this weekend, and it is running out of options for financing them. Analysts have said this could be tricky PR-wise as the country takes the rotating European Union presidency in July.
“The idea that taxpayers should backstop failed private risk after it has failed in banks is ridiculous. The policy up until now that has been pursued is not working,” Declan Ganley, Chairman and CEO at Rivada Networks said.
He added that this had caused huge problems for bailed-out countries where the burden on the taxpayer was unbearable in many instances.
“The idea that taxpayers across Europe can do that for failed insolvent institutions is unrealistic. There just can’t possibly be enough money to do that,” he also said.
Ganley said struggling banks should declare themselves bankrupt because the need for financing across all the euro zone’s banks was unknown and therefore could not be planned for.
“If there needs to be a pan-European solution for anything, it is bankruptcy. It’s an old-fashioned idea and needs to be liberalized so that we can allow these institutions to go through the insolvency purge that bankruptcy would bring. Find the bottom and grow, that is the only way you are going to get real growth back into the European economy,” Ganley said.
He suggested separating the solvent from the insolvent to avoid rewarding failure.
“These [banks] are the biggest losers in European industry and we are rewarding the biggest losers by propping them up. We need to allow the freedom to fail,” Ganley said.
Federalism ‘A Dirty Word’
The ripple effect across the global economy has long been cited as the reason that even allowing single, relatively small banks where cross border holdings could be significant to fail would have major ramifications.
Ganley said despite the high cost the alternative was worse.
“We certainly can’t afford to keep filling the hole because we don’t know how big the hole is. We are massively increasing the risk of an uncontrollable release of centrifugal forces across Europe, the collapse of the euro and perhaps with that the domino effect politically of undermining or collapsing the European project. Its political credibility would not survive,” he said.
He said Europe needed jointly-issued Eurobonds and fiscal union with democratically accountable institutions, which it currently doesn’t have.
“In many places federalism is a dirty word and it shouldn’t be. Most decisions should be made at the point closest to the citizen and in Europe over many decades we have transferred sovereignty of the individual to institutions that are not democratically accountable,” Ganley said.
He added that every day without closer integration credibility was “gushing away” from the bloc.
Michael Jarman, Chief Market Strategist at H20 Markets disagreed, saying that a two-tier Europe with a core and periphery was necessary, with the European Central Bank as lender of last resort.
“At the moment we’re running around in circles, no-one knows what mechanisms to use. If the ECB steps up and says ‘we’re willing to underwrite the debt from here’ it will instil a bit of confidence,” he said.