European Bank Troubles

by Ah Young Yoo and Gabrielle Reisner

When one thinks about bank troubles in Europe, one might assume that these issues have to do with short term funding problems. However, the real concern has to do with long-term lack of availability of funds and the ensuing financial impasse. Despite European banks’ efforts to issue more stable bonds since the financial crisis, the ownership of financial debt could soon prove to be a threatening problem.[1] Banks are refusing to lend because they can’t borrow due to the unknown quantity of the total debt that Greece owes. Because they cannot get any investment since the investors’ risk of not being able to retrieve the investment is very high—with instable economies of a few European countries including Greece and Portugal—the local banks are holding onto the reserves they have in case those fragile economies go into default.[2] Because of this situation, European financial markets are in limbo and have been stuck in a rather inactive state since the 2008 financial crisis, and even worse, such conditions are affecting the worldwide financial market. Reduction of banks’ lending is resulting in a decreased ability to invest in physical and financial capital, which interferes with economy’s self-recovery. Many measures have been taken in order to financially assist the local banks[3] and trigger investment into Europe; many developed countries and European countries themselves put much effort into the Europe-wide recapitalization plan, wealth transfers have been attempted, and legislation for greater fiscal coordination has been passed. However, most of the remedies were proven to be not helpful or unsustainable due to their temporary nature.

If any of the European banks were to go bankrupt due to the ownership of an overwhelming amount of Greek debt, investments would go down the drain. As a result, people would lose confidence in the Euro and the Euro would crash. An extreme long term effect could be hyperinflation.

Given above circumstances, it may be a better solution to tackle the origin of the problem. Instead of giving fleeting remedies that will only be needed once more if the problem persists, supporting Greece and other countries with turbulent economies by international funding by the IMF or more loose regulations could cure the issue from the very bottom of it.

Sources

Aglionby, John. “Eurozone Crisis.” Financial Times: October 12, 2011.

Thomas, Landon Jr. “In Euro Zone, Banking Fear Feeds On Itself.” The New York Times: September 6, 2011.

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[1] John Aglionby, “Eurozone Crisis,” Financial Times (October 12, 2011).

[2] Ibid.

[3] Landon Thomas Jr., “In Euro Zone, Banking Fear Feeds On Itself,” The New York Times (September 6, 2011)