There are fears in the market that EU governments have rejected the idea of providing a joint guarantee for the region’s banks to issue senior debt. If true, then those responsible have missed a crucial opportunity — yet again.
It is in every European country’s interest that the bank finance market gets back up and running. Forcing stricken governments to shoulder the weight of their own stricken banking sectors is not the way to do it.
There are several reasons why the individual government guarantee model does not work, but the main one is simple. Banks cannot fund because investors are worried about their holdings of government debt. Investors are worried about their holdings of government debt because those governments are insolvent, or close to being so. An insolvent government is not a viable guarantor in the first place, but if it were to guarantee the debt of its banks, its financial strength would be compromised even further.
It is such a basic concept that it could be used in primary schools to explain the concept of a vicious circle — perhaps accompanied by a darkly whimsical cartoon of the leaders of strong European economies (the club of one that is Angela Merkel) shooting themselves in the feet.
Neither the European Banking Authority nor the European Commission have been particularly forthcoming about the discussions, but reports suggest that Germany was the main voice of opposition to the idea of a European “guarantor syndicate”.
No surprise there — but you have to wonder why the idea of a guarantee scheme is even being discussed if Merkel is not willing to accept that showing some backbone and shouldering some responsibility as leader of the eurozone’s strongest economy is the only option left.
Of course the prospect of vouching for poorer countries is unpalatable to Germany’s electorate. But the region has now got to the point where political resistance needs to be countered by political responsibility. Germany’s health depends on the vitality of the eurozone. That vitality is slipping away and will do so even faster if banks cannot fund in the senior market at viable levels. Merkel needs to sell the proposal properly to the German people. She is a politician after all: that's what they are supposed to do.
Germany would not be acting alone. True, there is a rapidly shrinking group of eurozone countries strong enough to guarantee other countries’ banking systems, but there are enough. And while non-euro countries do not have quite as big a stake in the survival of the single currency, they have an enormous stake in the survival of the continent as a functioning economy. Adding their weight to a guarantee would bolster its strength.
The ECB’s covered bond purchase programme has been, if not non-existent, ineffective so far. It is the equivalent of having an empty lifeboat but only saving one person. Europe needs a pan-European solution to the senior funding crisis — if its strong sovereigns and its institutions must put all their strength into saving senior, the covered bond market will be saved alongside it.
When EU heads of state announced their Grand Plan at the end of October, they acknowledged that a “truly coordinated approach at EU level” was needed. Following the same template as the last round of government guarantees but tacking on Europe-wide levels for fees is a cop-out. After months of disappointment, Europe deserves better than that.