Saturday, November 12, 2011

Cleaning up bank balance sheets will make matters worse in EU

Banks have to clean-up their balance sheets. Regulators are requiring it and shareholders need to have it done.

This clean-up means that banks have to markdown sovereign debt. Greek bonds have declined by 42 percent since July. Banks have to stop buying poor credits, but if this is done the only buyers of last resort will be other sovereigns and the central banks. There is no escaping the economics of bad debt and the sooner governments realize this the better. The cleaning of banks will mkae the system's ability to handle new risky debt weaker. The options get tighter not broader over time. 

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