Davos Banks on Euro-Zone Survival
Posted by hkarner - 30. Januar 2012
Source: The Wall Street Journal
Cautious optimism was the buzz among bankers at the World Economic Forum in Davos.
While discussion continues about a possible breakup of the euro zone, few now expect this to happen—at least not yet.
Bankers believe many people are still underestimating what a game-changer the European Central Bank’s offer of unlimited three-year loans to banks has been. The policy is part quantitative easing, part proto-euro bond and part backdoor recapitalization of the banks via the boost to profits, according to one bank chief executive. By removing the prospect of a systemic bank crisis, the ECB has bought the euro zone time.
This optimism will get a further boost if Greece reaches a deal with private-sector creditors in the coming days. The prospects for a deal have improved markedly following acknowledgments that Greece’s official lenders could also take losses if a deal with private-sector lenders fails to put the country’s debt on a sustainable basis. Any official sector burden sharing would take the form of lowering interest rates rather than debt forgiveness, European economic affairs Commissioner Olli Rehn told The Wall Street Journal. That makes it less likely Greece will be forced into a coercive default that inflicts substantial losses on the ECB’s estimated €45 billion ($59.5 billion) exposure, something that would likely precipitate Greece’s exit from the euro zone. But the caution reflects concern that euro-zone governments won’t properly use the time that has been bought. The challenges are well understood. The current row over a possible loss of Greek economic sovereignty is a reminder that the risk of a political accident remains high. Italy and Spain need to press ahead with reforms to boost growth and restore competitiveness. Fiscal austerity and bank deleveraging will continue to take their toll on growth. The euro zone needs to increase the size of its bailout funds to create a more credible firewall to withstand contagion if other countries are shut out of funding markets. Portugal may yet need further support. Many believe only a clear commitment to fiscal transfers and euro-zone bonds can truly convince markets the euro will survive.
So long as these doubts remain, banks will continue to prepare for the worst. Many will use cheap ECB loans to buy domestic bonds, but most will continue to cut exposure to other governments. Similarly, they will continue to prioritize domestic lending as they deleverage and try to match cross-border assets and liabilities. Regulators are likely to encourage this process as they seek to ring-fence their domestic financial systems.
The euro zone’s challenge is to ensure that this fragmentation doesn’t ultimately become self-fulfilling. It still has work to do to turn cautious optimism into confidence.