“Is it one minute to midnight in Europe?”
ROUBINI AND FERGUSON: The Current EU Bailout Approach Is A Disaster
May 11, 2012
In an op-ed published on the Financial Times website Friday on the eve of the announcement of the Spanish bailout, economist Nouriel Roubini and historian Niall Ferguson wrote that the current approach to bailouts in the eurozone, which at the moment appears to be the way things are playing out in Spain, makes matters way worse.
Here are their thoughts:
The way out of this crisis seems clear. First, there needs to be a programme of direct recapitalisation – via preferred nonvoting shares – of eurozone banks, in the periphery and the core, by the European Financial Stability Facility and its successor, the European Stability Mechanism.
The current approach of recapitalising the banks by the sovereigns borrowing from domestic bond markets – and/or the EFSF – has been a disaster in Ireland and Greece: it has led to a surge of public debt and made the sovereign even more insolvent while making banks more risky as an increasing amount of the debt is in their hands.