by Barry Eichengreen, Peter Allen and Gary Evans
Financial Times
September 5, 2011
The eurozone is caught in a vicious circle. Sovereign credit is deteriorating, reducing confidence in banking systems, which in turn increases the likelihood that governments will have to assume additional bank liabilities. This further impairs sovereign credit, which further undermines confidence in the banks.
Europe’s leaders have shown themselves incapable of breaking this vicious cycle, raising the danger of the European crisis becoming a global crisis. It is now past due time for the International Monetary Fund and Group of 20 to intervene.
They must immediately demand consistent accounting treatment and regulatory oversight of European banks’ sovereign exposures. The International Accounting Standards Board has taken a first step, raising questions about whether eurozone banks are provisioning adequately for losses on government bonds. The problem it points to, inadequate reserves, is precisely what stops policymakers providing meaningful debt relief for the crisis countries.
Europe already has a model it can follow to ensure consistent accounting treatment and adequate reserves: the interagency country exposure review committee created by the US in 1979, and given powers to require banks to allocate specific reserves for assets impaired by country risk. This proved crucial in setting the stage for the Brady Plan that ultimately resolved the Latin American debt crisis.
More
No comments:
Post a Comment