As Chris wrote below, European political leaders and central banking types have been frantically trying to prop up European banks, which are significantly weakened by their over-exposure to sovereign and private bubble-induced debt. None of those efforts — so far — have succeeded, and the euro has continued its slide as a result ($1.33 as I write, after bottoming out earlier in the week at $1.32).
It now looks like Dexia, a bank co-owned by the French and Belgian governments, along with private investors, will be the first domino to hit the ground.
Let's start with the NY Times. Note the assumption of a default in Greece (my emphasis):
As European officials brace for the potential of a Greek debt default, Chancellor Angela Merkel of Germany said Wednesday that she would push for more capital to protect her nation’s banks. And European banking regulators were trying to identify the region’s most vulnerable financial institutions.Merkel wants to "protect her nation's banks" as the article stated. This is not the same thing as protecting the bank's investors (shareholders and bondholders), though I'm not sure Merkel would notice the difference.
Mrs. Merkel’s comments, after meetings with the European Commission here, came amid reports that customers were withdrawing savings from the French-Belgian financial institution Dexia, which is about to receive its second rescue in three years.
Shares of the bank, which is weighed down by its exposure to Greek debt, have plunged since Greece acknowledged over the weekend that it would miss the financial goals set as a condition for its receiving its next round of European bailout money.
Later in the article, the writer talks about the European banking "stress tests," which Dexia passed with ease. (Sound familiar?)
It's agreed that many of Europe's banks need capital, but there's no agreement on how to proceed:
Germany, the euro zone’s wealthiest member, seems politically inclined for each nation to protect its own banks. So is the affluent Netherlands. But France, the most dominant euro economy after Germany, is cautious about the whole exercise and is likely to lean toward an approach drawing upon the resources of the euro zone’s bailout fund — an approach the I.M.F. favors.It's easy to read Germany as the bad guy here, but even the French approach (relying on Euro-wide funding for the re-capitalization) has its flaws.
Is there enough willing money in the Eurozone to make every bank, and every banking investor, whole? If that's the goal, no wonder there's failure on the horizon.
This, therefore, looks more promising:
France, worried that pumping too much of its taxpayers’ money into a bank recapitalization could lead to a downgrade of its government debt rating — driving up the government’s own borrowing costs — has called for a new look at whether Greece’s private creditors should face higher write-downs on their Greek debt.The French may be willing to put the wood to private Greek investors. Would they do the same to private French and German investors?
I'll close with this, from the excellent economics writer masaccio (the whole piece is worth a read):
[T]he press is fixated on whether this will affect France’s AAA rating. Remember, if France has to make good on a guarantee, it has to borrow the money in Euros, and pay interest. That is a burden on French taxpayers. French bonds are falling against German bonds already.Time will tell in Europe, sooner rather than later.
There are no painless solutions. The only question is who will bear the pain. The US government is dominated by a financial oligarchy, (see Thirteen Bankers, by Simon Johnson and James Kwak) so we can assume it will be taxpayers who get slashed. At least in Europe, it looks like equity investors and maybe even some bondholders will take losses.
And make no mistake — if the dominoes start to fall in the Eurozone, there will be quite a bit of pressure here as well.
GP
