It is true that banks have slowed the pace of credit tightening, but they are nevertheless still tightening. "A banking crisis remains very much in play for much of the region," said David Owen from Jefferies Fixed Income.Once again-this is what we're supposed to emulate?
The credit squeeze is entirely predictable – and was widely predicted – given that banks must raise their core Tier 1 capital ratios to 9pc by July to meet EU rules, or face nationalisation. (The pro-cyclical folly of this beggars belief: by all means impose higher buffers, but not during a recession, and not by letting banks slash their balance sheets. The US at least forced its banks to raise capital, an entirely different policy since it does not lead to a lending crunch.)
The IMF said last week that Europe’s banks would slash their balance sheets by €2 trillion – or 7pc – by next year. This amounts to an economic shock. The Fund said deleveraging on this scale at a time of sharp fiscal tightening risks a "bad equilibrium".
Indeed it does. It ensures hell for countries containing 200m people, or more. Judging by the rise of Sinn Fein, the Dutch Freedom Party, the Dutch Socialist Party (hard-Left), France’s Front National, and some true fire-breathers in Greece, they victims will not readily put up with this.
Wednesday, April 25, 2012
Made In Japan
How Europe could be facing its own lost decade: