EUROPEAN BANKS’ VICIOUS DEBT STRUCTURE

It has been four long years since the EURO Debt Crisis was disclosed–first in Greece, and then in several other of the 18 countries countries which use the Euro currency.  Even the countries that do not use the EURO are not particularly much healthier–since a considerable amount of the Trade among European Countries is between the various Members of the European Union.  At least the other countries, however, are somewhat insulated, from the Euro-Zone Debt Crisis, since each still has it own Currency and Central Bank.

I find the linked article, from the NY Times, of particular interest, since it identifies a circular crisis within the EuroZone Banking System http://www.nytimes.com/2014/02/18/opinion/a-test-europes-banks-mustnt-fail.html?hp&rref=opinion.  Remember that Fiscal Policy (including National Debts and Budget) and Banking Regulation (including capital requirements) are currently controlled by the individual EuroZone Countries.   Later this year, however, the European Central Bank (ECB) will assume supervisory responsibility for the EuroZone’s 130 largest Banks.

Economists, Prof. Francesco Giavizzi and Prof. Anil K. Kashyap, the authors of the linked article, point-out three of the primary reasons which have reduced the possibility of a solution to the EuroZone Debt Crisis:

1.  The EuroZone Banks were not required to add equity capital after the recent Great Recession (4Q07-1Q09); because, that would have diluted Shareholder Value and it was always assumed that the respective countries would bail-out their own banks, if necessary.
2.  Without adequate Capital, the banks were not able to provide enough credit within their respective Countries.  Thus, the lack of an increased GDP reduced economic growth, as well as the Tax Revenue of the Member Nations.
3.  A good bit of the Banks’ Capital has been traditionally invested in the Debt of European Countries, whose ability to repay the bonds is questionable.  That has also reduced the efficient operation of the EuroZone Credit Markets

As yet, it is uncertain as to whether the ECB will:

1.  Force the Banks to make the tough decisions, such as raise considerable Equity Capital, restrain executive bonuses and increase lending.
2.  Encourage the Member Nations to grow their Economies through better Fiscal Management and Stimulus.
3.  Eliminate the assumption that the troubled Banks‘ will be bailed-out by the very Countries that have questionable Debt Credit Ratings.  Growing the National Debt would enhance the respective Counties’ Credit Ratings and, thus, their borrowing costs.  

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