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Europe’s credit crunch will be the next chapter of this banking crisis - The Telegraph - 05.05.23

Updated: May 7, 2023

Europe's half-formed banking union is woefully equipped to deal with instability says Ambrose Evans-Pritchard.


It is the fond illusion of Europe’s political and economic class that financial crises in the US have almost nothing to do with them. Each time they are rudely disabused.

Eurozone banks have so far shrugged off contagion from the falling dominoes among America’s regional banks, currently caught in a triple bind of deposit flight, deflating commercial property, and paper losses on holdings of US debt securities.


There is much self-congratulation in EU policy circles, where it is an article of faith that stricter European regulations have suppressed the problem.


Bank share prices have collapsed


Regional US Banks share prices (USD)

To which one can only retort: thank heavens for that.

If anything does go wrong – and there is a high probability that it will, given the galloping contraction in the money supply – the eurozone still lacks the machinery necessary to contain a banking crisis.


The EU authorities do not have the legal power to conduct the sort of rescue measures just concocted by the US Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation, acting in concert.


This is not to say that Washington has made a good fist of it.


The US has inadvertently invited a broader downward spiral by insisting banks must be seized, and shareholders and bondholders must be wiped out, before there can be a subsidised takeover.


It is now even harder for any lender in distress to raise capital or to find a buyer.

Who exactly is responsible for a bank rescue in the eurozone, and on what legal terms?

The Bank Recovery and Resolution Directive (BRRD) does not allow national governments to bail out uninsured depositors in a crisis.


There is no equivalent to the US “systemic risk exemption” clause, which limited contagion (briefly) after the collapse of Silicon Valley Bank.

The BRRD is a dog’s dinner.


It aims to ensure that taxpayers will never again be on the hook when banks fail. What it instead does is to guarantee havoc.


The terms are so harsh, and so contradictory, that many European banks could not meet the “bail in” threshold without having to confiscate the deposits of ordinary savers (as happened in Cyprus).


The deeper point is that the eurozone never completed its long-promised banking union. There is still no shared deposit insurance for banks. The infamous doom loop from 2011-2012 lives on.


Each country is still responsible for rescuing its own banks even though it cannot print its own money or set its own interest rates, and no longer has its own lender-of-last-resort; and even though it has no means of blocking dangerous inflows of speculative capital (as happened to Spain).


A banking crisis still threatens to pull any of the eurozone high-debt states into the abyss with it.


The even deeper point is that Germany, the Netherlands, and the creditor states of the North still refuse to accept fiscal union and permanent issuance of joint debt, for the legitimate reason that this would eviscerate the tax-and-spend sovereignty of their own parliaments.


Nor do they want to share their credit card with the unreformed high-debt economies of the South. This leaves the bloc exposed to a risk ‘spread’ drama every time trouble hits.

The European Central Bank is in an invidious position, partly of its own making. Core inflation is stuck at 5.6pc after rising for several months, but the eurozone economy has stalled and is in near recessionary conditions. Bank lending is contracting.


The ECB’s latest bank lending survey says lenders have been tightening net credit standards at the fastest pace since the eurozone debt crisis, which will have potent consequences in an economy with primitive capital markets that still relies on bank lending for 93pc of total credit.


The risk of a full-blown credit crunch rising by the day.


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Europe’s credit crunch will be the next chapter of this banking crisis - by Ambrose Evans-
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Christine Lagarde is a French politician and lawyer who has served as President of the European Central Bank since 2019.



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