Extending new loans to Greece, Portugal and Ireland, and short-term measures will not solve the eurozone sovereign debt crisis, warned Mervyn King, Governor of Bank of England.
King was presenting the first analysis on financial stability in the UK banking system after the new financial policy committee came into existence. Terming the eurozone debt crisis as a solvency crisis (long term liquidity crisis), he said short term bail0out loans will not solve the problem.
“Right through this crisis from the very beginning … an awful lot of people wanted to believe that it was a crisis of liquidity. It wasn’t, it isn’t. And until we accept that, we will never find an answer to it. It was a crisis based on solvency … initially financial institutions and now sovereigns”, he said.
King’s views run contrary to the views of the European Central Bank (ECB) and eurozone governments. Greece, Portugal and Ireland have already received billions of Euros from the ECB in an effort to stabilise these economies.
However, it is difficult to say if the bail-out money had had a positive effect on these economies. Governments were forced to commit spending cuts and austerity drives as a condition for the money, which worsened the situation since economies of these countries have been shrinking making it harder for countries like Greece and Ireland to cope with the debts.
To avoid a re-run of the 2008 financial crisis arising out of a possible sovereign default, eurozone governments, the IMF and the ECB are negotiating a €12 billion loan with Greece.
“Providing liquidity can only be used to buy time. Simply the belief, ‘oh we can just lend a bit more’, will never be an answer to a problem which is essentially one about solvency”, argued King.
The possible Greek default poses the biggest threat to the UK banking system, though their exposure to Greek debt is very small, said King. Royal Bank of Scotland (RBS) and HSBC holds Greek sovereign debts worth €1.1 billion and €800 million respectively. This compares favourably with France’s BNP Paribas and Germany’s Commerzbank, which hold nearly €5 billion and €3 billion Greek securities respectively.