Deposit Flight, Feeble Policy in the Eurozone




Edward Harrison is the founder of creditwritedowns.com and a former finance and technology executive. He is a regular financial commentator who has appeared on BBC World News, CNBC, and Business News Network among others. Benzinga Radio had the opportunity to speak with Edward this week about the ongoing debt saga that is unfolding in the Eurozone. He told us that the U.S. Dollar has potentially broken out of its long-term downtrend and that the path of least resistance in the greenback is higher.

Harrison also noted that there is a high correlation between the rising Dollar and the escalating crisis in Europe and that the strength of the greenback will be a good indicator of just how bad things are in the EU going forward. Harrison said that many of Europe's banks need to be re-capitalized in order to withstand systemic shocks triggered by the plunging value of sovereign debt in the PIIGS countries.

According to Harrison, without new capital, some of Europe's most vulnerable banks could go bankrupt, sparking an even more dire situation in global financial markets. Speaking about the recent downgrades of bank credit in Europe, Harrison told Benzinga that the actual downgrades may not have been that significant, but merely a "stamp" from the ratings agencies. Essentially, the market had already effectively downgraded European financial institutions months ago.

He added that he was surprised that the French banks have come under so much pressure recently, as opposed to Spanish banks or even a deposit run being triggered in Greece. This shows the systemic risks that exist in Europe. It is not just a handful of banks and a couple of countries. The debt crisis is much larger than that. Essentially, it now encompasses the entire region in a profound way.

Harrison expressed his concern about the hesitancy that many banks are showing in raising capital and also the "kick the can down the road" mentality of EU policymakers. He believes that the current situation is frighteningly similar to what happened in 2008. The current strategy of politicians in the EU appears to be one of buying time, and hoping that some unforeseen development will trigger an easing of the crisis.

Harrison sees the likely outcome of this strategy as being one of disaster. He believes that the next step will be either a continued widening of spreads in Spain and Italy and/or the possibility that French, Austrian, and Belgium bond markets come under pressure as well.

On the banking front, Harrison said that there is the potential for deposit runs at European financial institutions if retail clients become concerned enough. He also said that we could see banks in countries which are currently perceived to be relatively safe get caught up in the mounting crisis.

One of the problems that Europe faces right now, according to Harrison, is that there is simply not the political will to massively re-capitalize the banks through programs similar to TARP and TALF which were instituted in the United States during the credit crisis. He said that for something like this to take place, it would require that things become quite a bit worse - which they very well may.

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