The EU realized too late that the slow and sometimes non-existent coordination in containing the Greek fiasco is now putting the banking sector in serious trouble. The repeated beating that the French banks are receiving in the markets, not to mention lowered credit ratings, are prime examples of how fear of contagion and excessive forgiveness of sovereign debt obligations would put the world's biggest lenders on the edge of the abyss.
Now, the Eurogroup is going to discuss whether the recovery fund can be adjusted in order to strengthen the banks' capital reserves.
The storm that unraveled in August showed us that the banking system is fragile and vulnerable. Its ability to finance itself in the global markets essentially depends on perceptions of solvency. It was apparent that stress tests were useless in calming the markets, so we must implement, not just talk about, fast-acting mechanisms to fortify the banking system if we are to avoid another plunge into recession.
Liquidity problems, small deal margins and looming losses related to the debt in the banks portfolios: the sector is not in a position to contribute to economic growth. Instead, they will weigh it down by increasing credit restrictions. In Spain, financing problems are already apparent.
In August, lenders upped their appeal to the European Central Bank (ECB) to 34% after months of contention. More worrisome is the fact that this request was 21.4% in total for Europe, when in June it was only 13.2%.
