Financial Times
October 19, 2011
The sovereign debt crisis has degenerated into a banking crisis. One did not need an economics degree to predict this. A sovereign debt crisis always leads to a banking crisis. Yet policymakers did not see it coming, or if they did, they failed to act in time.
We now hear that the solution is a massive and quick recapitalisation of banks. Such a recapitalisation is seen by many as an essential ingredient in the grand rescue package that the European leaders will be discussing this weekend. But who can recapitalise the eurozone banks quickly? Given volatile conditions in equity markets, only governments can swiftly garner the financial resources necessary. But to do so, governments would have to issue more debt. The results are very predictable. Rating agencies would blindly downgrade governments that participated and this would inevitably intensify the debt crisis.
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