José Viñals, director of the IMF's Monetary Affairs group, is talking breaking the dangerous bond between the banks and sovereign debt. The European Banking Union will help to dissolve current holdings and work hard to erect defenses against them in the future through a strategy that shares bankruptcy risks across all banks and recapitalizes the banks directly.
At present, the only way to solve the problem is to fix the economy. At the height of the crisis, a thin connection between the banks and the government was established, which bailed out both sides, because they knew that the situation they had created was not sustainable.
Business was falling for the banks, so they were interested in any kind of revenues they could get. Governments, especially peripheral countries such as Spain, needed a way to finance their operations when investors fled to greener pastures. Now that the recovery is starting, the aid that banks received to back sovereign debt is no longer necessary. They are in a position to start lending, which can charge national economies across Europe. Viñals insists that for this to happen we must continue to scrutinize the banks even though they have made massive efforts to recapitalize and build provisions, because unknown risks are still out there. Potential loan defaults are a big one.
If upcoming stress tests prove that the Spanish banks have cleaned up their balance sheets, then investors will regain confidence about the sector's health and the banks will be ready to start lending and jumpstart business in Spain. If that happens, then the banks and the rest of the national economy will be better off.
