Slowly, painfully slowly, a plan seems to be coming together to save the Eurozone. Wolfgang Münchau, writing in The Financial Times, says he has never seen European leaders looking so scared. And they have good reason to be scared; Robert Peston, the BBC’s Business editor, argues that:
Unless the banks are fixed, there will remain too big a risk that a financial crisis could turn the current global economic slowdown into something more akin to depression than recession.
Europe’s banks, then, are under fire. The expected plan to rescue them (along with the rest of the Eurozone) would involve three steps. First, quadrupling the “firepower” available to the EU’s “bail-out fund” – the European Financial Stability Facility (EFSF) – from the current 440 billion euros to a figure closer to 2 trillion euros. Second, the shoring-up of Europe’s banks through recapitalisation measures.
These first two steps would be necessary to prepare Europe for what would come next, because the third step would be a Greek default – with a predicted haircut (i.e. write-down on loans) of up to 50% for investors. This would send shock-waves through the global financial system similar to those caused by the collapse of Lehman brothers in 2008 – which is why it’s important to make sure Europe’s banks are ready for what might be coming.
BNP Paribas S.A. is the second largest banking group in the world, with headquarters in both London and Paris. We spoke to Christian Lajoie, Head of BNP Paribas Group Prudential Affairs, and asked him what the situation was like in Europe’s banking sector. Are things as bad as reported?
I would say no. Because, from what we know – and this is the case also for a lot of banks – normally banks should be compliant with the new Basil III reforms… And we will be. Even in June, we already had a relatively high level of capitalisation, and you can see a very big improvement in terms of the capitalisation of French banks. So, you already have a big increase, and we are on the way to be compliant with the Basil III requirements.
What is being said, however, is that everyone would like to accelerate that compliance, and expects banks to comply with requirements by 2013 that were originally planned to be in effect only by 2018. And this is a little bit more difficult to achieve… In the present market it’s almost impossible to raise equity, especially for the banking sector.
For Mr. Lajoie, the problem is more about politics and market psychology than with any underlying weakness in the banking sector:
I’m very worried by the global pessimism of the market and of people when there isn’t really much reason to be so. What we need is time… Obviously, we need time because people cannot suddenly go from a relatively lenient policy to a strict one. We need to keep some growth, and this growth will not be possible if we apply harsh measures too quickly. What we need is political will, expressed clearly, commonly and with no doubt about the willingness to really implement what is being said.
What do YOU think? It seems likely that Greece is heading towards a default. Is this a good idea? Will it calm the markets and end the crisis, or are we heading towards an even bigger storm? Let us know in the form below, and we’ll take your ideas to experts and policy-makers to respond.
Christian Lajoie began his career at BNP in 1974 and since then has held various business and senior management positions in France and abroad.