17/03/2013 by Don Quijones
Why is it that 17 nations have to fundamentally reorganize themselves and shift sovereignty away from national parliaments to new layers of transnational, beyond-control bureaucracies that can extract untold wealth from taxpayers—just to save the banks?
That’s what the Eurozone has to do, or else banks will topple, and the monetary union will not be sustainable, according to the “first ever European Union-wide assessment of the soundness and stability of the financial sector,” released Friday by the institution that the world couldn’t do without, the IMF.
“Financial stability has not been assured,” the report stated flatly about the fiasco in the Eurozone, despite ceaseless hope-mongering by Eurocrats and politicians, and banks remain “vulnerable to shocks.” The report, which never mentioned banks or countries by name, discussed a number of “risks” that could topple these banks, with some of these “risks” already having transitioned to reality:
“Declining growth.” Banks with “excessive leverage, risky business models, and an adverse feedback loop with sovereigns and the real economy” are particularly vulnerable. Hence, most banks. A number of European countries have been in a deep recession, some of them for years. So “declining growth” is a reality, and these “shocks” are happening now, said the IMF in its more or less subtle ways.
“Further drop in asset prices.” Real estate prices are now dropping in some countries that didn’t see a collapse during the first wave, including France and the Netherlands—where it already took down SNS Reaal, the country’s fourth largest bank [A Taxpayer Revolt Against Bank Bailouts In the Eurozone]. So hurry up and do something, the IMF said.
The report points at other risks for banks. Pressures in wholesale funding markets could dry up liquidity and tighten refinancing conditions. And the market could lose confidence in the sovereign debt that banks hold. For example, an Italian bank, loaded with Italian government debt, would topple if that debt lost value—but of course, the report refuses to name names.
And in “several countries,” the heavy concentration of megabanks “creates too-big-to-fail problems that could amplify the country’s vulnerability.” So Germany, France, and the UK. Alas, in Europe too-big-to-fail doesn’t necessarily mean big. In tiny Cyprus, fifth country to get a bailout, the banks, though minuscule by megabank standards, are getting bailed out anyway. It’s psychological. A fear. If even a small bank were allowed to go bankrupt, the confidence in all banks across the Eurozone would collapse. That’s how fragile Eurocrats and politicians fear their banks have become—despite their reassurances to the contrary.
And so “policymakers and banks need to intensify their efforts across a wide range of areas” to save these banks, the IMF exhorts these Eurocrats and politicians.
Big priorities: “bank balance sheet repair”; banks should build larger capital buffers to be able to absorb shocks. And “credibility” repair of these balance sheets. In an admission that bank balance sheets still aren’t worth the paper they’re printed on, the IMF calls for stiffening the disclosure requirements, “especially of impaired assets” that are decomposing in hidden-from view basements.
The new Single Supervisory Mechanism (SSM), the EU-wide banking regulator under the ECB, to be operational by early 2014, would have to have real teeth, along with expertise, the IMF pointed out. It should regulate all banks in the Eurozone “to sustain the currency union” and in the entire EU to sustain “the single market for financial services.” In other words, without the SSM, the currency union won’t make it.
But the IMF’s killer app is the Banking Union, a “single framework for crisis management, deposit insurance, supervision, and resolution, with a common backstop for the banking system.” Under this system, taxpayers in all Eurozone countries would automatically be responsible for bailing out banks, their investors, bondholders, counterparties, and account holders in any Eurozone country.
For the most hopeless cases, the Single Resolution Mechanism would step in to dissolve banks “without disrupting financial stability”—hence bail out investors, disrupting financial stability being a term that’s commonly used to justify anything. The medium would be the transnational taxpayer-funded ESM bailout fund; it would bail out banks directly, rather than bail out countries after they bail out their own banks—which is the rule today.
In the process, countries would surrender much of their authority over banks—and how or even whether to bail them out—to this new instrument. Decision makers would be Eurocrats, far removed from any popular vote. Victims would be the people who’d end up paying for it. Investors and speculators would profit. Other beneficiaries would be politicians who’d no longer have to bamboozle voters into bailing out banks because it would be done by a distant power.
The dictum that there is never an alternative to bailouts would be cemented into the system. Democracy, which always gets trampled during bailouts, would be essentially abolished when it comes to transferring money from citizens to bank investors. And that’s of course the ultimate goal of the banking industry.
Wolf Richter writes about the big economic, financial and political issues du jour on his blog Testosterone Pit.