The International Monetary Fund (IMF) have released a stack of reports and papers over the last couple of days, including the one stating that the Greek bailout operation has been more or less – a fiasco, so far. But there’s more: New research indicates that the international banking is continuously increasing their risk taking and that more any more trouble with the European banks may have severe spillover effects on financial institutions outside Europe,
“Both German and French banks mostly transmit/receive shocks to other European banks, especially in the UK. French and U. banks pre-crisis also appear to have strong spillover to Russia. Outside of Europe, spillover are largely confined to the US.”
Hélène Poirson/Jochen Schmittmann
The average sensitivity to European risk, specifically, has been steadily rising since 2008. Banks that are reliant on wholesale funding, have weaker capital levels and low valuations, and higher exposures to crisis countries are found to be the most vulnerable to shocks. The analysis of bank-to-bank linkages suggests that any globalization of the euro area crisis is likely to be channelled through UK. and US banks, the research paper says.
The report “Risk Exposures and Financial spillover in Tranquil and Crisis Times: Bank-Level Evidence” provided by Hélène Poirson and Jochen Schmittmann was released yesterday in the shadow of IMF’s Greek audit report.
(Transcript of IMF press briefing on Greece here.).
This report is not necessary reflecting the official IMF view, but provides some interesting details on who will influence who if more trouble occur.
The researchers have discovered a clear pattern of interconnectedness between European banks.
“French and German banks co-move strongly only with selected US financial institutions, while UK banks are connected strongly with both Asia (pre-crisis only) and the US (in both periods).”
“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”
“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”
Moreover, the researchers have mapped the connections between the individual institutions.
“The estimation framework allows us to highlight the presence of “clusters” of interconnected banks that tend to co-move together more strongly than with other banks, either due to inter-bank linkages (counterparty relationships, interbank-lending) or the exposure to common vulnerabilities.”
A few examples
.
.
- Large German banks appear to co-move strongly either with other German banks or with other European banks.
- Spillover from German banks to other European banks are most pronounced in the case of French and U.K. banks and, to a lesser extent, in the case of Dutch, Belgian, and Swiss banks.
- During the subprime crisis and in the post-crisis period, a Franco-German cluster can be detected comprising Deutsche Bank and BNP Paribas and a UK-German cluster comprising Commerzbank, Barclays, and RBS.
- None of the banks from peripheral crisis European countries (GIIPS) are found to co-move in a significant way with the largest German banks.
- Spillover from German banks to other regions appear limited to the US: prior to the subprime crisis, two of the large German banks seem to co-move significantly with banks in the U.S. (namely, Deutsche Bank with Lehman Brothers and Hypo Real Estate with Goldman Sachs)25; during and following the subprime crisis, Freddie Mac and Fannie Mae have synchronized returns with the largest German financial institutions (Deutsche Bank, Commerzbank, and Allianz), which in turn can be traced back to the latter’s sizeable holdings of subprime portfolios and related exposures to US real estate.
Conclusions
“Similar to German banks, the spillover of French banks to other regions are largely limited to U.S. financial institutions and can only be detected since the onset of the subprime crisis.”
“The financial spillover of U.K. banks, by contrast, reach beyond Europe in both periods. Pre-crisis, there is empirical evidence of strong co-movement of US, Indian and Chinese banks with U.K. banks; during the subprime crisis and post-crisis, spillover to U.S. banks are dominant and the analysis does not detect any co-movement with banks in other regions.”
“In summary, we can tentatively conclude from the analysis of bank-level spillover that direct financial spillover from the EA banking and sovereign debt crisis transmitted through the equity markets outside of Europe are likely to be confined to US banks and financial institutions. Indirectly, however, given the role of the US as a global financial hub, such spillover – if they were to intensify – could potentially transmit more widely to systemic banks in other regions (Asia, Latin America, and Middle East).”
“The analysis in this study leaves unspecified the channels of transmission of financial spillover both within countries and across borders. While this undertaking is beyond the scope of this paper, it would be an important avenue for further research.”
Definitively!
(Download the full report here.)
.
More fun stuff:
- Please, Don’t Mention “Contagion”!
- IMF Director Christine Lagarde Sees “Crisis of Confidence”
- The Worlds Most Contagious Countries – Here’s The List
- Europe In Debt (Part 1): Creating a Monster
- Europe In Debt (Part 2): Poisonous PIIGS With Toxic Lipstick
- Europe In Debt (Part 3): Exit On Main Street
- In The Bright Minds Of IMF
Other possible related articles:
- IMF admits mistakes on Greek bailout (bbc.co.uk)
- Brussels fights back in Greek crisis blame game (guardian.co.uk)
- ‘Masters of Austerity’ Targeted as Blockupy Activists Shut Down European Central Bank (commondreams.org)
- German banks can´t withold Dibabank (yournovelty.wordpress.com)
- Brussels fights back in Greek crisis blame game (guardian.co.uk)
.
The European Community Is Disintegrating
Professor George Irvin makes another attempt to explain why the European leaders mishandling of the financial crisis will only make things worse: In Brussels there seem to be a total lack of understanding of the diversified emotions amongst the euro zone’s citizens – mixed with an ignorant perception that a “one-size-fits-all” policy is the way to fix the problems. However, at the moment any sense of community spirit we Europeans might have is eroding.
“Think of what would have happened to Louisiana after Katrina had it been dependent on selling its own dollar bonds to the international market to raise money!”
George Irvin
The European Community Spirit?
“Another EU debt crisis and another inadequate bailout with more strings attached. In the coming year we shall almost certainly see more Club Med countries attacked by the bond markets, and told by their euro zone/IMF masters that the only alternative is to accept dramatic cuts and to slash ‘unaffordable’ welfare spending. In the absence of fundamental euro zone reform, piecemeal fire-fighting will fail,” professor Irvin writes in a blog post after the Irish bailout.
As professor Irvin rightfully points out, we Europeans have never had a real common community spirit.
VISIONARIES: Robert Schuman and Jean Monnet, founders of the European Union.
The European Union is the result of – in this bloggers opinion – a well-meant, but unrealistic, political idea of equality and cohesion.
An ideology that in theory is a very nice thought, but in reality very hard to achieve.
The cultural differences in Europe has roots going back several centuries – it’s not gonna change in a mere decade or so.
George Irvin believes that a shared political identity amongst Europeans has to be forged.
He may be right, but again; it will take time – probably lot’s of time.
Meanwhile – our political leaders are trying to fix things by implementing systems and mechanisms that might work in one place, but causes anger and frustrations elsewhere.
In an article published back in 2008, I said that this crises calls for leadership of the unusual kind – the kind that one might be willing to die for.
At that time I did not see any political leaders in Europe at that possessed such qualities.
I still don’t.
Well, without further comments, here’s honorary professor at the University of London, George Irvin:
Another EU debt crisis and another inadequate bailout with more strings attached. In the coming year we shall almost certainly see more Club Med countries attacked by the bond markets, and told by their euro zone/IMF masters that the only alternative is to accept dramatic cuts and to slash ‘unaffordable’ welfare spending. In the absence of fundamental euro zone reform, piecemeal fire-fighting will fail.
Ireland’s pre-emptive drastic austerity measures taken last year were meant to have solved its problems.
Harvard’s Kenneth Rogoff told the New York Times that “if you want to escape default, the Irish path is the only way to go”.
The aim of public expenditure reduction was to reassure the financial markets that the government was serious about cleaning up the damage to the banking system caused by the collapse of the country’s huge property bubble.
According to Jean-Claude Trichet, speaking earlier this year, Ireland’s cuts provided a role model for Greece.
But now it’s all gone wrong.
Self-imposed austerity has meant that Irish GDP has contracted by over 10% since 2008 and its GNP even more so; the latest unemployment figure stands at 14% and rising; the budget gap is enormous and the country’s largest banks need bailing out.
As in the past, with jobs disappearing, the young are emigrating.
At the heart of the crisis is double denial: in Ireland, while the Finance Minister, Brian Lenihan, has spent weeks denying that his country needed help, Ireland has turned increasingly to the ECB for money it could not find on acceptable terms elsewhere.
Denial too in Europe: the euro zone and the IMF have come to the rescue with a package of €90bn (to which Britain, whose banks hold nearly half of Irish banks’ debt, has contributed about €10bn).
But the stringent conditionality imposed will push a stricken economy deeper into misery.
Euro-sceptics claim it’s all the fault of the euro: if only Ireland had kept the punt and could devalue, they argue, all would be well.
The argument is faulty for two reasons.
First, there are numerous examples of countries with their own currencies which have been pushed into IMF receivership: Mexico in 1995, Asia in 1997, Russia, and so on.
Secondly, Ireland is devaluing ‘indirectly’ through pushing down wages: that’s what the phrase ‘internal devaluation’ means.
George Irvin is a retired professor of economics . He is now honorary professorial research fellow in development studies at the University of London, SOAS.
No, it’s not the euro that’s at fault; the problem is that Europeans don’t want to accept that currency union means genuine economic and political union.
In the USA, the individual states may have considerable autonomy (just as Canadian provinces or German laender do), but their economic survival is ultimately the responsibility of the federal government which issues bonds and can borrow on international markets.
Think of what would have happened to Louisiana after Katrina had it been dependent on selling its own dollar bonds to the international market to raise money!
Others will argue, not without reason, that Europe has no polis, no shared political identity and culture.
They tend to forget that until the mid-19th century, Americans identified far more with their home state or region than with Washington—and some still do.
A shared political identity needs to be forged; it is the product of a vision which transcends local boundaries.
At the moment, economic crisis is eroding any sense of European community we might have.
That’s what ultimately could kill the euro.
By George Irvin
(Original post at the EUobserver.com)
Related by The Swapper:
Related Articles:
6 Comments
Filed under International Econnomic Politics, National Economic Politics, Philosophy
Tagged as European Central Bank, European Union, Eurozone, Financial Markets, Health and Environment, IMF, International Econnomic Politics, International Monetary Fund, Ireland, Jean Monnet, Jean-Claude Trichet, Kenneth Rogoff, Law & Regulations, New York Times, Philosophy, United States, Views, commentaries and opinions