Arnold Kling  

Eurozone: Markets Applaud Latest Can-Kicking

The Drop in Home Equity... The Party Line Continuum...

Sony Kapoor writes,

Setting up an agency that is capable of resolving (shutting down, selling or recapitalizing) banks is perhaps the most urgent part of such a banking union and can be done independently from pooled deposit insurance or common supervision, but is not being prioritized by EU leaders and will still take a long time to be set up.

Pointer from Tyler Cowen.

I believe that for the crisis to end, two things have to happen: the defaults by insolvent governments must be formalized, so that creditors know exactly how far to mark down the value of their holdings; insolvent banks must be resolved, as Kapoor defines resolution.

The new agreement accomplishes neither of these. The financial markets were pleased. As is often the case, I am baffled by the markets.

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CATEGORIES: Eurozone crisis

COMMENTS (8 to date)
Philo writes:

The new agreement shows a weakening of Merkel's resolve; *that* is the good news, which rightly encouraged the markets.

Thucydides writes:

What good would "resolving" the banks and writing down sovereign debt do, where there is an ongoing flood of excess sovereign borrowing to support the mass entitlement state whose commitments are beyond what can be covered by taxes without killing the economy?

mj writes:

Give us five good libertarian paragraphs on Wonder Bread and in response to the apparent assumptions in N.Y. Times review today, p 19)

Becky Hargrove writes:

...and the can will continue to be kicked until people agree upon what needs to be saved, and how to move forward from that. Clearly, people need to be able to live and work in the structures that exist now so those contractual obligations need to be met. Likewise for baseline existing entitlements that allow individuals to maintain their own community infrastructures. That having been said however, something needs to be considered. The upcoming generations do not have the wherewithal to be able to support any of the above and community infrastructure will need to change in response. Some understanding of that reality needs to happen, before a clear shift or 'the can stops here' becomes possible.

Harold Cockerill writes:

All this baloney about the banking sector in Europe and the efforts to fix it shifts the focus away from what is the real European problem. The citizens of many European countries don't produce enough to cover their nations expenses. Freeing their markets to increase productivity is the only path out of this mess. They will not do this as long as they can convince productive nations to lend them money. Lending them money is stupid which means that is probably what will happen.This will most likely end very badly.

Jon writes:


The basic problem that the Eurozone is trying to escape is that sovereign debt was considered riskless and moreover that the risk differential between euro member countries was taken to be zero.

Contrary to blubbering about eurobonds, the ECB payment settlement system has already mutualized the debt. Depositors have moved approaching 1T from the periphery into German banks. The end of this is that if a country leaves the Eurozone, it's CB will likely default on this intra-CB debt. The remaining CBs have indemnified each other and the governments are on the hook to recapitalize the CBs if something goes wrong.

The idea that German would leave the Euro zone, btw, is mindless. In the current system they are the ones with the 1T liability in their banks, but under the existing rules are only on the hook for 27% of that.

The market's reacted positively to the summit because the EZ is finally moving to address the core flaw: bank supervision is done at the national level and those regulators are not setting the risk-weighted capital requirements appropriately and are adequately supervising the banks.

If this supervision was being done properly, there wouldn't be deposit flight from the periphery. There would be diminished risk of a sudden imposition of capital controls or a bank holiday (because the national bank regulation apparatus will be gutted). It would be possible to insure deposits centrally.

Yancey Ward writes:

Philo is correct. The German wallet seems less well protected today.

Jacob AG writes:

"As is often the case, I am baffled by the markets."

Most interesting sentence I've read on EconLog in a while.

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