Markets are on tenterhooks to see how the Eurozone’s new merry-go-round of money, known as its bank recapitalisation scheme, is going to work.
And following yet another delay in the unveiling of the plan – with Monday’s summit pushed back a week and few details likely until November – they will be waiting a little longer.
The IMF has put the cost of a grand rescue at €200bn. Credit Suisse says it could cost up to double that, which would make Dexia’s €4bn rescue a one per cent tip of the iceberg.
And that doesn’t include the potential cost of underwriting banks’ dodgy assets, which Belgium and France have guaranteed to the tune of €90bn for Dexia alone.
So what are those dodgy assets? In large part, they are government bank bonds.
And therein lies the problem. The only way for indebted governments to bail out banks is for them to issue more debt, further boosting the risk that they will default on the bonds banks already hold.
No wonder analysts are concluding that a mass bailout will, at best, buy time to deal with a liquidity crisis.
But the underlying problem, according to both Moody’s and UBS banks analyst Alistair Ryan, is sovereign solvency. Ryan wrote on Friday: “What banks collectively need, in our opinion, is the return of Italian and French default risk to the remote possibility they were considered before Greek [private-sector burden-sharing]… Capital is not, in general, the core of the issue.”
Hardly music to Merkozy’s ears.