Miles to go before the Euro Crisis is resolved!

This appeared as a Comment piece in the Observer (Guardian) on 11th December

EU leaders promised to stop Europe’s spiral into economic oblivion. They needed to immediately restore confidence in the solvency of Spain and Italy, urgently take steps to kick start growth and credibly commit to changes addressing the institutional weaknesses of the Euro area. They failed on all three fronts and are now almost out of time.

Given the inability of EU leaders to tackle the problems of Greece, a small economy, investors have been losing faith in their ability to support the much larger economies of Spain and Italy that faced economic problems. This has driven up the borrowing costs to unsustainable levels. Unless policy makers can demonstrate how troubled EU economies could meet their borrowing needs at non-penal interest rates, the crisis would continue to deepen.

Lehman Brothers is Dead - Long Live Lehman Brothers

Transcript of a Keynote Speech I delivered In Berlin on the 15th Sept 2010

The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.

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.

Eurozone sovereigns must be stabilized before banks

Note: This Appeared in the Financial Times's A-List on the 25th of November

Europe’s dance of death between sovereigns and banks has now turned frantic and much more dangerous. Troubled countries, such as Italy and Spain, continue to weigh their banks down. Growing problems in French, Cypriot and Belgian banks are putting pressure on the countries.

As Mohamed El-Erian argues, action is needed on multiple fronts to stem the worsening crisis but I don’t fully share his priorities.

The (bad) State of the European Union and its Banks

At the beginning of September I had written, 

“The Euro Area crisis has turned systemic and no sovereign or financial institution is immune to getting sucked in. The worsening problems in Greece are increasing the likelihood of a collapse of the deal agreed just in July and the large aggregate exposures of EU banks to Italian and Spanish sovereign debt have put a question mark over the solvency of individual banks as well as the EU banking system as long as these countries don’t have access to refinancing at reasonable costs.  In addition near term growths prospects have collapsed increasing the likelihood of losses on assets and lowering expected profits.” 

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