Richard Koo Says Europe Needs to Go Big on Banks
Joe Weisenthal:
RICHARD KOO: There's Only One Solution That Can Save Europe Now: The proposal of using taxpayer money to recapitalize European banks is already on the table. If the plan is to be meaningful, the accompanying principal reductions must be large enough to enable the distressed nations to resume growing. Some have proposed increasing the haircut for Greek bondholders to 50% from the original figure of 21%. If they really intend to implement this bold proposal, the authorities should simultaneously announce a large capital injection into the banks. Unless the two measures are presented as a package, attention will focus solely on losses at the banks, exacerbating the atmosphere of mutual mistrust within the financial sector.
The authorities should also declare that they are prepared to inject capital with few or no strings attached. And the capital must be relatively cheap, since the ultimate goal of this exercise is to prevent a credit crunch. With so little time available, the authorities need to prepare a capital injection that can be implemented together with the principal reductions without waiting for banks to raise their own capital….
Provide a full guarantee for financial institution liabilities as Japan did in 1997 and the US did in 2008.
Prepare a capital injection scheme to prevent principal write-downs and the resulting losses from draining bank capital and sparking a credit crunch.
Make it easier for the banks to accept the capital by attaching as few strings as possible, and keep the cost low enough that banks will not need to cut back on lending.
Because so little time is available, the government capital injections should be presented as a funding source of first, not last, resort.
It was, I think… April 2008… when I first said that this could get very bad, and that if it got bad the best solution was for the government to buy the banks for a song--given that they would be insolvent--recapitalize them, and then privatize them off gradually later on.
It's difficult to know what alternative policy road might be successful right now. Yes, there is a Greek debt problem. Yes, there is an Italian growth problem. But those are both less urgent than the bank cratering now going on in Europe.
