Financial Times
May 28, 2012
The ties that bind the eurozone’s tottering banking system to its weakest governments are growing ever-tighter. The region would clearly be better off if its banks owned no government debt. But the banks are the biggest owners of government debt, and governments are becoming owners of banks.
Yesterday showed the lengths cash-strapped governments will go to in order to prop up banks. Spain confirmed it is considering giving Bankia, its third-biggest bank, €19bn of government bonds to shore up its capital. In other words, it would write an IOU.
Spain, it has repeatedly been said, is not Greece. The difference is that Spain can give its banks its own debt in an effort to restore confidence. Greece had to give four of its banks €18bn of debt from the rest of the eurozone, funnelled via European Financial Stability Fund bonds.
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