domingo, julho 29, 2012

European Deposit Insurance still missing

I have discussed the need for pan-European deposit insurance at least 20 times in my blog PPP Lusofonia, beginning in November 2010, before the full dimension of the crisis was visible, so you might say I am obsessed with protecting local depositors and stabilizing local bank funding.  The topic is finally drawing some deserved attention in 2012, even if only to say "nein"! 

If only the refusal was justified. The fact that "no one of the top German economists is proposing deposit insurance" may  just mean that they all think alike and  that none of them are willing or able to look at the real needs beyond German borders, or that they wouldn't recognize a black swan if they saw it.   

Voilà a good example of the value of diversity!
Having witnessed bank runs in  Argentina many years ago, I would very much like to be proven wrong, for the right reasons. That is, to see the European banking crisis resolved and the Euro saved without the need to guarantee retail deposits.   What I fear, however,  is to be proven right  for the worst reasons, if the divergence and capital flight continue and result in a severe haircut to local savers, a la"corralito". 

So let's keep the concept on the table, of a European Deposit Guarantee Scheme  that would protect small (250.000€), local deposits from the risks of bank insolvencies and currency redenomination and convertibility.   A retail Deposit Guarantee is not inconsistent with the opposition to pooling wholesale bank liabilities  and with requiring  the large wholesale creditors of insolvent banks to take losses on  their risky exposure.  These are two very different sources of bank funding with different loss absorption capacities and behaviours.  To treat the deposits of local families and shopkeepers in the same manner as the bank bonds held by foreign hedge funds is absurd in economic and regulatory, as well as social, terms.

Another issue is whether we need a Deposit Guarantee scheme, or a self-funding Deposit Insurance scheme.  In the beginning, a super-sovereign guarantee is probably needed because the insurance fund would not have enough assets to be credible, unless it was funded by revenues from a new European tax on financial transactions.  That would be poetic justice indeed, to have hedge fund and program trader finance the security of local retail savings, which are so critical to the rebalancing of the Eurozone.  

But the German economists’ opposition to pooling distressed bank liabilities seems to be a case of "do what I say, don't do what I do".  In fact, German and other international banks have used this lengthy creeping crisis period to reduce their inter-bank exposure in the distressed countries, as they have been the primary beneficiairies of the ECB bailout largesse. 

Meanwhile the TARGET2 balloon keeps inflating. The Bundesbank's TARGET2 credit claims jumped  from €498 billion  in Dec-2011  to  €728 billion  as of June 2012, (starting a €96 billion  in June 2008). And  the imbalances are accelerating.  This reflects the tsunami of capital flight  such as the €163 billion that left Spain in the first five months of 2012, according to the BdE.  
How many weeks will it take  for the Bundensbank's net claims to reach €1.000 billion? 

This quote from an early blog post  remains sadly current, nearly two years later.
30-Nov-2012,  The Euro Stability Pact, the Single Currency and the Single Market  
...Thus, financial markets are likely to remain volatile, until the EU resolves the underlying balance of payments problems of the unbalanced “Single Market”, not just the symptomatic stresses within the “Single Currency”.  Among other things, this means protecting domestic retail depositors in the deficit countries rather than cross-border professional investors from the surplus countries, who are, even   now, enjoying the benefits of moral hazard...
Mariana Abrantes de Sousa