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      There is no silver bullet

      There is no silver bullet

      “It is a race against time to put measures into place to save the Euro,” says Giles Keating, Managing Director of the Private Banking Division at the Credit Suisse, based in Zurich. At the European Alternative Investment Funds Conference in Luxembourg, organised by ALFI, the local fund industry association, he praised the efforts of the European Central Bank. Nevertheless, he acknowledged that banks in the Eurozone are under pressure.

      Giles Keating is not talking about regulatory requirements on how to raise more capital, but about the growing pace of money withdrawal from the Eurozone banks. “It is not just German banks not lending to Italian or Greek banks, it is also international depositors like mutual funds that no longer review their very large deposits with any bank in the Eurozone”.

      Despite the European Central Bank’s effective way lending to banks to make up for the withdrawals, financial institutions start to shrink their balance sheets even faster than intended by the regulatory push. What is more, many banks cannot lend on the inter-banking market longer than overnight or a week. Instead, they have to borrow from the ECB.

      It is obvious that there is no time to waste, because the sovereign debt crisis is spilling over into the banking system. In the Eurozone, the French banks were the most severely affected with an exposure of € 9.3 billion to Greek sovereign debt and nearly € 42 billion of exposure to other Greek debt.

      Three steps to heaven

      Giles Keating, economist by trade, lists three steps to put the Eurozone economies back on track. The first point is a list of actions that need to be taken by Greece, Italy and Spain or any other country with a sovereign debt problem. According to Mr Keating, they have to raise taxes, cut spending, and privatise assets as a way of reducing the debt without squeezing their economies too much. For a real world example, he shows where the rubber hits the road: “In Greece a taxi driver, when retiring, can sell the license to someone else. The Greek government wants to take that back and follow other countries where it is the government that issues licenses - not the taxi drivers themselves.” 

      The second step is action to help the banks. The ECB is already doing its job by making up for that deposit flight. Recapitalisation is another measure that has to be put into practice. Mr Keating thinks that the ultimate figure is much larger than the €106 billion predicted by the European banking authority ESMA.

      Stabilising the sovereign bond market is the third step on his list. He lashes out against the European Financial Stability Facility (EFSF), a special purpose vehicle to combat the European sovereign debt crisis, saying, “There is this famous EFSF which we hear so much about, but see little action and its potential successor, the European Stability Mechanism.”

      Ending on a high note

      Though the outlook might look gloomy for large parts of the Eurozone, at the moment things don’t look too bad for the global economy. Manufacturing orders are picking up again in the United States. There are other fundamentals that give ground for optimism: U.S. companies have the highest level of cash relative to their balance sheets in 55 years.  This upward trend is good news for the job market.

      “Companies are actually hiring, with U.S. jobs rising at an average rate of almost 200,000 every month. For the politicians, or anybody who cares about unemployment, it is not enough, but it is job creation. And consumers are spending in the U.S.: retail sales are growing at an annual rate of 3% after a slowdown in the summer,” says Mr Keating. What is more, the emerging markets matter now more than ever: consumption in these countries is now larger than in the U.S.

      Giles Keating concludes in his speech at the ALFI conference in Luxembourg that the banking system is strong enough to withstand one shock - such as a real estate shock - but it cannot withstand a series of shocks occurring at the same time. CW