Bond Guarantees

The need for pan-EU funding support for banks

Dear Members of the ECOFIN,

A sense of a worsening crisis has hit the EU. Sovereigns and banks are being shut out of funding markets. They find it increasingly hard to refinance their maturing bonds at affordable interest rates.

In the panic following Lehman’s collapse in 2008, EU governments took national level initiatives to provide emergency support to banks through capital injections and funding guarantees. Given that so many sovereigns are themselves unable to borrow at sustainable rates this national level approach will not work at this time.

The interconnectedness of the EU banking system is so high that the inability of banks in troubled countries to fund and recapitalize themselves through the markets is weighing all EU banks down.

Europe's dance of death between sovereigns and banks

Note: This is my response, in the Financial Times A-List, to George Soros\'s suggestion that the the EU guarantee its banks. Re-Define believes that the most sensible thing to do is to first reassure the world that sovereigns such as Italy and Spain are sound

George Soros is right in saying the discussion on recapitalisation of European banks is flawed. However, the best way to address the panic in the banking system is not through guaranteeing the banks, but through restoring full faith in the solvency of large Eurozone economies instead.

Weaknesses in the European banking system have been known for some time, so why the sudden panic?

European Union policymakers have let Greece’s unique fiscal problems colour their prescription for countries such as Spain and Ireland which had banking, not fiscal, crises. Growth has also suffered in other countries, as austerity measures became fashionable. This economic slowdown, weak stress tests and the EU’s inability to handle the relatively small problems of Greece, combined to also erode confidence in Spain and Italy.

An Optimal Design for ESM (European Stabilization Mechanism)

This Policy Maker Brief aggregates the advice Re-Define has provided to a number of European Finance Ministries, the European Parliament and the European Commission in a single place and in a format best suited for decisions by the Euro group of finance ministers and leaders on the design of the permanent European Stabilization Mechanism.