It’s Easter weekend here in Germany and I caught this interview with Willem Buiter from the Financiëele Dagblad that I get by e-mail each morning. I thought it was significant enough that I would translate it. Buiter has been fairly pessimistic about the future integrity of the euro zone and thinks that some of the euro members are destined to leave the euro area.
In this interview, Buiter talks about Cyprus and European banking and he praises the intervention from Eurogroup head Jeroen Dijsselbloem. The most important takeaway is that he believes that the capital controls in Cyprus can last a few months at most; otherwise Cyprus will certainly exit the euro area. See Jon Danielsson’s take on that from yesterday. The second big takeaway comes from the article’s title. Buiter thinks most European banks are zombies that need to be recapitalized or resolved. In most cases this can be done by haircutting senior and subordinated bondholders only. Depositors would be spared. Cyprus is the exception because of the capital structure of the banks. The price tag will be between 1 and 3 trillion euros.
Buiter believes the second Cyprus deal was much better than the first. As I wrote in the New York Times after the first deal, bail-ins should be restricted to just the insolvent banks and after wiping out shareholders, should include all classes of creditors including senior bondholders. That’s what we got in the second Cyprus deal. Buiter says this is the way forward. He also agrees with what I have been saying, that Europe needs to act comprehensively rather than on an ad-hoc basis as and when crisis occurs.
I should note, however, that the way Laiki’s deposits were shifted to Bank of Cyprus with the existing ELA obligations was wrong. Each of these banks needed to be recapped and resolved separately if the deal was to be fair. Laiki’s non-guaranteed depositors should feel hard done by since all of the good assets have been stripped from the bank and they are left with dud assets against which only they must take losses. How this is legal, I don’t know.
The zombie bank problem was indeed the same problem in Japan – and we know that this led to poor credit growth and eventually led to more bank failures down the line. The next US downturn could reveal the same, as I have been predicting.
Note that the problem here is private debt that resulted from excess credit growth and resulted in significant malinvestment. The public debt distress is only an outgrowth of the attempt by households to deleverage, by government to socialise losses and the euro area government’s lack of fiscal space as currency users. The banks are front and centre in this private debt problem as Buiter rightly clarifies.
The first half of the translation comes after the jump for Credit Writedowns Pro subscribers. I will do the second half when I have time later today.
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