The Bankwatch

Tracking the consumer evolution of financial services

Is the Greek debt haircut really a victory?

The Euro leadership and in particular Merkel and Sarkozy deserve some credit for the key Euro deliverable earlier today.  There has been much criticism and most of us would agree that more will be required to be done, but there was an important step taken here.

It became a showdown between banks and government.  (For government read taxpayers paying up).  Merkel has been consistently speaking of bondholders taking a haircut for a year now.  The message was clear and she won today.  But is it that simple.

Calling Bankers’ Bluff, Merkel Got Europe a Debt Plan | NY Times

But Mrs. Merkel called the bankers’ bluff, said officials present at the discussions. Accept the 50 percent write-down, she told the bankers, or bear the consequences of default. In effect, she was willing to risk a credit event, and to place the blame for any fallout on them.

Relevance to Bankwatch:

The inconvenient truth is that modern banks lie in dangerous economic shadow zone that is part government and part commercial company.  Let me explain.  Banks operate with razor thin capital bases.  Even at 9 or 10% capital, no normal independent company could survive. (Ask GM).  Banks operate with a tight and close interaction between themselves and their respective central bank. 

Lets go back to Merkels ‘victory’.  Banks will accept a write down of debt with Greece but who pays?  Banks whose capital is (more) inadequate following the write down, there is already an agreement in Europe to re-capitalise the banks by yes, government.  This re-capitalisation will result in greater government ownership of banks. 

This is simply shifting money around, and banks become another method for government to borrow “off balance sheet”.

Not much room for consumer financial services innovation in this conversation.

Written by Colin Henderson

October 27, 2011 at 23:06

Posted in Uncategorized

One Response

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  1. [...] Bankwatch: The inconvenient truth is that modern banks lie in dangerous economic shadow zone that is part government and part commercial company. [...]


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