Regular readers know that your humble blogger thinks that EU leaders should act right now by reminding the Spanish government that it has a modern financial system. This system includes both deposit guarantees and access to central bank funding. As a result, Spain should require its banks to recognize all the losses they are currently hiding and to subsequently rebuild their book capital levels through retained earnings.
The result of Spain taking this action will be to remove the drag of excess debt from the Spanish economy and the return to growth.
By also requiring its banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off balance sheet exposure details, market participants can confirm that the losses have been recognized and exert discipline to restrain future risk taking by the banks.
In short, Spain should adopt the Swedish model with ultra transparency for handling its bank solvency led financial crisis.
Would this be a positive development for banker bonuses in other parts of the world? No.
Once Spain implements the Swedish model and puts the financial crisis behind it, the rest of the EU is sure to follow. And where the EU goes, the UK and US are likely to follow.
After all, what depositor would want to keep their money in a bank that hasn't recognized all its losses and signals to the market it has something to hide by not providing ultra transparency?
Of course, there are always advocates for the Japanese model for handling a bank solvency led financial crisis. In the US, the leading advocate is the President.
In an impatient and forceful message, Mr Obama said there was “a path out of the crisis” if only leaders would take the “decisive actions” needed.
In Madrid, Berlin and Brussels officials denied that a rescue plan for Spanish banks was ready to launch this weekend, but Mr Obama blew their cover. “The focus must be on strengthening the banks, like we did in 2008,” he said. “EU leaders are in discussions about that and they are going in the right direction.”This is only the right direction if one thinks that protecting banker bonuses should be the EU's top priority.
If instead one thinks that ending the financial crisis should be the top priority, then the EU leaders should not be spending their time talking about unnecessary bailouts of the Spanish banks (after all, according to IIF figures, it will only take 4 years to rebuild their book capital levels).
Instead, they too should be adopting the Swedish model with ultra transparency and requiring their banks to recognize all their losses today and provide ultra transparency so that market participants can confirm this fact.
Eurozone finance ministers have called crisis telephone talks today to decide whether to cajole Spain into requesting a multi-billion-euro bank rescue package or give Madrid more time to solve the crisis itself. Spain would be the fourth eurozone country to seek international aid.
At the White House Mr Obama said: “The sooner [leaders] act, the more decisive and concrete their action, the sooner people and markets will regain some confidence.”Regular readers know that the only source of market confidence is transparency. Market investors trust their own independent analysis of the facts.
One of the lessons of the financial crisis has been not to trust governments when they talk about the safety and soundness of their banking systems. What with Ireland, Spain and the stress tests, there have been constant reminders that governments and financial regulators are incapable of telling the truth about the current condition of their banking systems.
Adopting the Swedish model and requiring their banks to provide ultra transparency are the decisive and concrete actions that will result in people and markets regaining some confidence.
Predicting a prickly reaction, Mr Obama said America was “not scolding” European leaders. “We can prod, advise but only they can make decisions,” he said. But his criticism of Germany’s handling of the crisis was unbridled: “If you are engaging in austerity too quickly, it makes it harder to pay off your debts. Markets respond... if you’re contracting, they bet you’re not going to pay off your debts.” After a bank bail-out, a proper plan for growth is needed, he said.If I was advising the Germans, I would suggest that they and the rest of the EU adopt the Swedish model with ultra transparency. Not only would they not have to bailout the banks, but the real economy would recover as the drag of excess debt is removed. In turn, this would reduce the need for austerity.
This is a win-win-win for everyone except the bankers.
Mr Obama said the crisis was America’s business because if Europe goes into a recession, “that means we’re selling fewer goods, fewer services, and that is going to have some impact on the pace of our recovery.”And this would severely hurt Mr. Obama's chances for being re-elected.