26 March 2013

"An Approach We Should Take"

To answer my own question, I don't think that Britain will go the way of Cyprus. My argument is that Cyprus and its tragedy is a better pointer to the real problem than Greece and its troubles. While I wonder how much Russian money there is spinning through British banks, the real worry is the instability of the finance sector.

Not so long ago some commentators were proclaiming the end of the eurozone crisis. I was sceptical; the crisis was in remission, not cured. My opinion was based, not so much on the capacity of eurozone leaders for policy errors, but my awareness that the fundamental problems in the banking and finance sector have not been resolved.

There had been a plan for a European fund to recapitalise failing banks. When the time came for the fund to act in Cyprus, it didn't happen.  So when Mr Dijsselbloem, the Dutch chair of the Eurogroup committee said that the Cyprus solution "is an approach that we should take," he was right.

The shareholders and bondholders of failing banks should be the ones to take the loss, not the taxpayer. This is the approach that should have been taken when Ireland's banks got into trouble. Instead the ECB forced the Irish government to underwrite the banks turning the banking crisis into a public debt crisis.

The fear back then was that losses in Irish banks would undermine banks in other places whose failure in turn would lead to more failures with a cascade of banks collapsing like a line of dominoes. It could happen like that. The problems in Cyprus's banks were triggered by the losses on Greek bonds included in Greece's bail out package.

That is where my question could becomes serious. How are the dominoes set up and where does Britain's banking sector stand in the line up?

Mr Dijsselbloem implies that each country will be responsible for its own banks if they fail. While he has been forced to "clarify" his comments, we should still ask how big is the banking sector compared to a country's national income? I have found some ECB figures for the aggregated assets of banks and compared them to Eurostat figures for GDP.

Source: ECB, Eurostat
As you can see, Luxembourg and Malta are ahead of us in the queue.

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