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Soros: A path through Europe’s minefield

Thursday 13 October 2011 – by George Soros / Project Syndicate

Europe’s leaders need merely to guarantee the banking system first and only recapitalise it later, when the crisis has abated and both government bonds and bank shares have returned to normal levels, says George Soros.

Earlier this week, a group of almost 100 prominent Europeans delivered an open letter to the leaders of all 17 eurozone countries. The letter said, in so many words, what the leaders of Europe now appear to have understood: they cannot go on “kicking the can down the road.”

And, just as importantly, they now understand that it is not enough to ensure that governments can finance their debt at reasonable interest rates; they must also address the weakness of Europe’s banking system.

Indeed, Europe’s banking and sovereign-debt problems are mutually self-reinforcing. The decline in government bond prices has exposed the banks’ under-capitalisation, while the prospect that governments will have to finance banks’ recapitalisation has driven up risk premiums on government bonds.

Facing the prospect of having to raise additional capital at a time when their shares are selling at a fraction of book value, banks have a powerful incentive to reduce their balance sheets by withdrawing credit lines and shrinking their loan portfolios.

Europe’s leaders are now contemplating what to do, and their next move will have fateful consequences, either calming the markets or driving them to new extremes.

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All agree that Greece needs an orderly restructuring, because a disorderly default could cause a eurozone meltdown. But, when it comes to the banks, I am afraid that the eurozone’s leaders are contemplating some inappropriate steps.

To read this article in full, please visit our partner site, Project Syndicate, by clicking here.

Copyright: Project Syndicate, 2011. www.project-syndicate.org

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