The so-called stress tests of European banks were a joke. This is the opinion of at least one company treasurer, whose job it is to park his company’s funds safely, as quoted today’s Financial Times. His opinion is not the only one. Americans are avoiding many large European banks entirely, especially Spanish banks, but some German and Italian banks are also considered to be too risky to leave money with.
These banks are being bailed by loans from the ECB, and the ECB itself is being bailed with loans from the US government. The amounts being lent are secret.
These measures have prevented a recent Lehmans type collapse in Europe.
But if no one else is lending to the suspect banks, other than governments, there must come a time when the support required to keep them all going brings on financial fatigue. In the US, 200 banks a year are closing and being taken over by other banks, often losing depositors money in the process. In Europe, Icelandic banks are the only ones so far to destroy the savings of depositors. But they may well not be the last to do so.
The game of spot the next bank to fail is very much in the minds of company treasurers, as they seek safety for their cash reserves. That fear is hardly likely to encourage investment into new ventures. Until the banks are sorted out, the effect of fear will cripple the economic recovery. It would be better to seize the moment, and close some doors of the suspect banks before a major crisis hits, shattering confidence in the financial markets. But no, with banks as with Greece, the preferred course in Europe is do nothing, bail out, sit and wait for the crisis to strike, while Credit Default prices quietly escalate. Greece has to pay 11.7% to borrow ten year money, for example.
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