EU’s bank rescue strategy political/economic catastrophe

[BoyRacer]

Why the EU’s bank rescue strategy is turning into a political and economic catastrophe - Wolfgang Münchau -> tinyurl.ie/1me

The anniversary of the collapse of Lehman Brothers was without a doubt the single most symbolic moment of the financial crisis. But, at least for Europe, it was not the quintessential turning point. That came on Tuesday, 30 September 2008, when Brian Cowen, the Irish prime minister, gave a blanket guarantee for the entire banking sector. His decision bounded the other eurozone leaders into following suit. The rest is history.

I would go as far as to classify the decision as one of the most catastrophic political decision taken in post-war Europe. This not so much because of the decision itself – it was necessary to stop the rot at the time – but because of a lack of action to embed the decision into a strategy to solve the problems of the banking sector – lack of capitalisation, abundance of toxic assets, poor management, and of course, excessive size. The consequences of that strategy will only become apparent in the years to come. We saw a small glimpse last week when Ireland’s recognised the black hole inside the banking sector, which will cost the country a cool 32 per cent of GDP this year alone. I myself recently estimated that the cost of Irish bank rescue would ultimately run up to about 30 per cent of GDP, which seemed a shockingly large number to some of observers. As it turns out, I was unrealistically optimistic - as I so often am. The Germans, too, are notorious optimistic about the underlying states of its banking sector, large parts of it are not properly capitalised.

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