Europe must allow fiscal integration or face default
Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk, feels that government spending and easy money from central banks has covered up deep seated problems. December 05, 2011 | Satyajit DasThere are worrying indications now that the European debt crisis will take a long time to correct. An inability to diagnose and deal with the problem means that the European debt problems may have reached a point of no return, which a change of leadership cannot arrest. With the problems having now reached Italy (which has $2.56 trillion in debt, more than five times Greece’s $500 billion), the policy options and political will to deal with the issues are now limited. The Greek write-downs created speculation for Ireland, Portugal and perhaps even Spain and Italy would need to follow suit, especially if economic conditions deteriorate. An enhanced European Financial Stability Fund (EFSF) was also the cornerstone of efforts to quarantine Spain and Italy as well as, increasingly, Belgium, France and Germany from the further spread of the debt crisis. The EFSF’s available capacity of around $270-336 billion is inadequate to fund bailouts, recapitalise banks and avoid contagion. Over the next three years, Spain and Italy will need to find around $1.34 trillion to meet their financing requirements. Italy alone has to find over $400 billion in 2012. Schemes to enhance the capacity of the EFSF—borrowing to leverage the fund or partial guarantees or seeking Chinese funding—have meet a lukewarm reception. This has led to ever more fanciful financial engineering to try to make the fund’s Euros stretch further. More worryingly, the EFSF’s attempts to raise money to meet existing commitments has run into problems, meeting lacklustre support and a sharp increase in costs. The failure of the plan to mollify investors and markets has made contagion a reality, with the crisis now engulfing Italy, Spain and re-infecting Ireland and Portugal. Increasingly, stronger countries like France (at risk of losing its AAA credit rating), Belgium and Germany. The European debt crisis is nearing its endgame. The options remains the same: fiscal union, greater... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Capital & Strategic Issues, Government Finance, Risk and RegulationCapital & Strategic Issues,Government Finance,Risk and Regulation, Capital & Strategic Issues,Government Finance,Risk and Regulation, , Capital Marketscapital, Capital Markets, Keywords:European Financial Stability Fund, Euro Crisis, European Central Bank, Dexia, Bundesbank, GDP European Financial Stability Fund, Euro Crisis, European Central Bank, Dexia, Bundesbank, GDP
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