Sovereign debt problem and the risk of financial dislocation
Posted on 27. avr, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
We have emphasized several times that the weak link of the financial system is sovereign debt solvency and that the latter is closely linked to European Banks and Cash liquidity. Now this scenario is materializing as confirmed by Riskelia’s Financial Markets Radar.
Greece’s solvency problem has turned into a major liquidity crisis preventing Greece from refinancing its debt on the markets. The Greek problem has quickly spread to Portugal and Spain. Then, the sovereign debt problem has infected the banking system by three canals. First, banks hold stocks of European debt used to secure financing via repo transactions. Second, local retail banks are highly vulnerable to austerity plans imposed by the European Commission as they involve deflation and trigger waves of defaults in households and businesses. Third, depositors losing confidence in the ability of insolvent governments to guarantee their deposits run on their banks. This process is already at play in Greece today, where bank deposits have fallen 8.4 billion euros, or 3.6 percent from December 2009 to February 2010.
In the short term, the Greek liquidity problem will be alleviated by the welcome intervention of the IMF and the European countries but this won’t resolve the sovereign and banks’ solvency problem in the long run. The scenario of the next crisis is written : banks, funds, governments, and businesses should urgently set up resilience strategies as this time we cannot count on over indebted governments to rescue the system.
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