Monday, October 17, 2011

Europe heading towards a process for reaching a solution to its financial problems

It is pretty clear from reading the comments coming out of European officials today that they do not intend to announce THE solution to the sovereign debt and bank solvency crisis in six days.

Rather, they are going to announce a PROCESS for getting to this solution.

Regular readers know that this is exactly what your humble blogger has been advocating.

My blueprint for the process Europe should adopt is based on disclosure (first by the financial regulators and then using a data warehouse with each bank's current asset and liability-level data).

With disclosure, market participants can use their analytical capabilities to help in determining how much capital in total and for each bank is needed for a recapitalization.  Subsequently, a decision can be made as to the source of the capital - private markets, retained earnings, bailouts...

Simultaneously, European officials can tackle resolution of the sovereign debt problem.

From the Telegraph Live column:

Germany's finance minister Wolfgang Schaeuble has been speaking in Düsseldorf this morning. And this, on Reuters, is what he said:
QuoteEuropean governments will not present an ultimate solution for the sovereign debt crisis at an upcoming European Union summit.
German Chancellor Angela Merkel's spokesman Steffen Seibertis doing his best to sprinkle a bit of reality back on to the euro crisis. He said:
Quotedreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled.
At a speech in London Schaeuble said that governments would not try to spend their way out of the debt crisis, and that while bold steps were required, there would be no miracle cure for the crisis. He said:
QuoteWhile in the case of Greece, a further restructuring of debt might be necessary, it is not a panacea. Without fiscal and structural reform, Greece's deficits and debts will reach unsustainable levels again.
Which suggests that the sovereign debt problem is going to take time to resolve.

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