As talks wind down in Poland, European leaders still divided on debt crisis
Yes this is a case of pay now or pay later, but that is not the critical issue. Who pays, is the issue.European leaders made little headway Saturday on resolving a banking crisis that threatens to weaken their economies and spread damage overseas to countries such as the United States.
Finance ministers from European Union nations gathered in Poland for two days of talks and even invited Treasury Secretary Timothy Geithner to their meeting to explain how the U.S. handled a similar crisis in 2008-09.
Yet EU ministers did not coalesce around any rescue plan for Greece or troubled European banks. Some also brushed off advice from Geithner, who’s urged them to stimulate their economies and act quickly to shore up their banking system.
Wealthier EU countries such as Germany have been balking at a larger bailout of Greece using public money. All EU leaders have agreed on so far is that their banks need to be strengthened by raising more capital.
“From our perspective, we see a clear need for bank recapitalization,” Swedish Finance minister Anders Borg said. “The EU banking system needs better backstops and that’s basically a matter of capital.”
The big question is where the money will come from, especially since private investors appear unwilling to risk more cash. A shortage of dollars prompted the Federal Reserve this week to engage in large currency swaps with European central banks that effectively injected more liquidity into the EU’s financial system.
Most analysts think European governments will have no choice but to use public money. Jay Bryson, global economist at Wells Fargo, said Germany “can pay now or they can pay later.”
Bear in mind that is just German banks. French banks are also severely undercapitalized. Also note the target is a mere 5% equity ratio, implying a leverage ratio of 20-1, still hugely over-leveraged from a common-sense standpoint.Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital, German newspaper Frankfurt Allgemeine Sonntagszeitung reported, citing a study by economic research institute DIW.
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