Cleaning up banking sector key to solving Europe's debt crisis

Updated: 2011-02-24 13:52


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BRUSSELS -- Europe needs a swift, radical and comprehensive solution to the sovereign debt crisis, and cleaning up the banking sector should be a top priority, a European economist said in a recent interview with Xinhua.

"The first thing to do is to clarify the situation of the banks, so as not to play the Japanese strategy," said Jean Pisani-Ferry, director of European think tank Bruegel.

There is an interdependence between the bank and sovereign crisis and the interdependence across countries, but the European Union (EU) has failed to address systemically the interdependence during the past year, he said.
When the EU tries to solve the problem one by one, there is too much uncertainty that keeps worrying the markets, the economist said.

He deplored that the bank stress tests the EU conducted last year did not give the answer. What is still missing is the exposure of peripheral banks to potentially non-performing loans, which results in risks for banks in the rest of the eurozone, and for sovereigns in both peripheral and non-peripheral countries.

To shore up market confidence in Europe's banking sector, the EU conducted stress tests on 91 European banks last July, of which only seven banks failed.

"That is very unfortunate, because what they did was to reduce or destroy a credibility," Pisani-Ferry said.

To increase credibility of the stress tests to be conducted this year, Pisani-Ferry suggested that the EU involves the International Monetary Fund and the Bank for International Settlements in the process.

After clarifying the situation of the banking sector, the eurozone countries must proceed immediately with necessary banking restructuring, the director suggested in a policy paper that Bruegel published earlier concerning the comprehensive approach to the debt crisis.

In Pisani-Ferry's opinion, the debt-to-GDP ratio of Greece is too high and the insolvency of Greece is inevitable. But the public debts in Ireland, Portugal and Spain are more manageable than that in Greece.

He said the EU should consider debt reduction for Greece and the possibility of restructuring Greek sovereign debt instead of postponing it until 2013 when the EU's permanent rescue mechanism is due to be in place.

The EU's current stance of "no default now, but possible default on bonds issued from 2013" is inconsistent and not credible, according to the economist. Markets will be priced in the default option, making it difficult for troubled governments to borrow.

"It's time to clarify, to recognize when banks are insolvent, when states are insolvent, to respond to the problems instead of remaining in denial," he said.

To complete a comprehensive package to solve the debt crisis, the economist also suggested that the EU should revise the conditions of EU assistance programs, further empower the European Financial Stability Facility, reduce the public debt in Greece, and foster adjustment and growth in peripheral countries.

At the summit to be held from March 24 to March 25, EU leaders are expected to adopt a comprehensive package to deal with the debt crisis, but what the package should include is still under intense discussion. Leaders from the 17 eurozone countries will hold a summit on March 11 to focus on how to boost the competitiveness of eurozone economies.


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