Monday 25 September 2017

Eurozone still riddled by chronic debt

Europe's banking system remains vulnerable despite what EU chief Barroso says, writes Eddie Hobbs as he gives his top 10 rules

Eddie Hobbs

JOSE Manuel Barroso's insinuation that Ireland infected the euro and its banking system can be safely filed away under 'popular fiction'. The EU Commission chief knows full well that the deeply integrated eurozone banking system is not cured of its chronic underlying disease -- too much debt. The accumulating €700bn ESM fund is a measure of the scale of what may yet come if the current period of calm is merely an interregnum between crises. Europe's only escape route is economic growth at lift-off velocity -- an outcome that remains uncertain. What's less well understood is what's to happen first, before the ESM lends a cent to any eurozone government.

Pull the veil aside and what Ireland gifted Europe was the Cypriot solution debuting in March this year. This followed the template drawn up by the little-known Financial Stability Board (FSB) established by the G20 in London in 2009 and first chaired by the current ECB chief Mario Draghi. Its October 2011 report, Key Attributes of Effective Resolution Regimes for Financial Institutions, better called the Bail-In report, lines up deposits for haircuts and, where a sovereign is bordering on insolvent, depositor guarantee schemes may be breached before the cavalry arrives. The core of FSB thinking was adopted by an EU directive agreed between Barroso's EU Commission and EU finance ministers in Luxembourg in June 2013. No one is to become another Ireland. So as the year ends let's remind ourselves of March 2013 and Cyprus.

The Cypriot economy, roughly about an eighth the size of our own, contracted in 2009 following the US sub-prime crisis, plummeting commercial property prices by 30 per cent. Cyprus had allowed an outsized banking sector to grow, exposing a fifth of its assets to neighbouring Greek private sector debt. Bank deposits reached almost €100bn -- that's five times the size of the economy -- half of it from Russian businesses. Think Anglo on steroids.

Please sign in or register with Independent.ie for free access to Opinions.

Sign In

Don't Miss