No relief in sight for Eurozone borrowers
“If you (the periphery/borrower) owe 100 and can’t pay, you have a problem. If you owe 1000 and really can’t pay, the core/creditor has a problem."
This issue of who will absorb bank losses masquerades as the liquidity versus solvency debate. If it were seen merely as a question of liquidity and funding, then it could be resolved by the ECB, the monetary authority of the Eurozone. If it a question of bank solvency and asset quality, then it should be resolved by the national central banks, under home rule prudential regulation.
The quick answer is that when Portuguese banks have to sell US or Brazilan assets because of lack of funding, it is a question of liquidity. When German, French or British banks find themselves overexposed to troubled periphery borrowers and have to take losses on impaired assets, that's a question of solvency.
By definition under the concept of the sovereign rating ceiling, local depositors and creditors cannot regard their own sovereign debt as impaired, so the local sovereign exposure should be treated as a problem of liquidity rather than a problem of solvency.
Mariana Abrantes de Sousa
See also Banks, central banks and moral hazard
Eurozone balance of payments crisis
Lessons from earlier balance of payment crises http://ppplusofonia.blogspot.com/2011/11/licoes-de-crises-passadas-exportar-mais.html
Distribution of bank exposure to Eurozone borrowers ´
One-armed midgets cannot rebalance Eurozone
What are CDS good for anyway?