In the run up to the euro zone summits on a solution to the debt crisis, the EU has agreed that around 100 billion euros is needed to boost the capital — that is cash reserves — of Europe’s banks to protect them against the losses on loans made to Greece.
When they made the loans the banks were not expecting a partial default and did not set aside enough capital.
They are now wrangling over how much recapitalisation will come from government and how much from private investors.
Economist Rym Ayadi at the Centre for European Policy Studies think-tank told euronews: “We have to recognise that the banks have somehow exposed themselves to sovereign debt and with this sovereign debt there is somehow zero risk charged, which means there is no capital that is imposed to hold this sovereign debt; and it’s a kind of mutual game now between the governments and the banking industry, so the solution has to come in an agreement between the banking industry and the governments.”
The politicians would prefer that more of that recapitalisation cash comes from private investors rather than from their treasuries.
Thierry Philipponnat, the head of Finance Watch, an organisation set up to counterbalance the lobbying efforts of banks, said governments should get something in return for helping the banks: “There are several ways for banks to be recapitalised, either it is public money — that is the European fund or direct domestic money — that is one way, or it’s private capital. So if it is public money then the leaders should absolutely require that public money comes at the price of not reducing lending to the real economy.”
The battle of wills continues between the bankers, who are worried about some of their number going bust, and the politicians who are concerned about the region slipping back into recession.