Eric Chaney, former French Treasury official and former Chief European Economist at Morgan Stanley is the present Chief Economist at AXA. He tells Bloomberg television’s Maryam Nemazee that the banking crisis in Europe is also a credit crunch. Non-financial businesses are trying to ensure liquidity. So they have cut production to accumulate the cash they cannot get through credit channels.
This, Chaney says, means recession in Europe. I agree. Then, is it the IMF to the Rescue? I doubt it. For his, part Chaney says we should not expect too much from the upcoming G-20 meeting. Forget about the BRICs riding to the rescue and taking credit risk just to help Europe. The bank issue comes first.
Chaney gives credence to the idea of a EuroTARP/EuroTALF in which the European Investment Bank (EIB), takes the money from the present bailout facility, the European Financial Stability Facility (EFSF), and capitalises a special purpose vehicle (SPV). This SPV then turns around and issues bonds and uses those funds to buy up the sovereign debt of the European periphery or to recapitalize the banks.
I see this as another extend and pretend measure. Even Italy will not be kept on life support by the ECB. There is no appetite for that. Incoming ECB head Mario Draghi’s comments tell you that. Chaney agrees with me and his former colleague Elga Bartsch that if Italy does its part of the quid pro quo by making reforms that cut government spending, only then will the ECB step in in size. This austerity-focused policy will mean more economic weakness. Chaney thinks that will also force the ECB to cut rates.
Watch the video (it runs ten minutes).
Notice Chaney makes the point I have made consistently about Spain (and Ireland) being in a fundamentally different position than Italy, Portugal and Greece. Spain just needs to handle its banking crisis deftly. On labour market reforms, Chaney takes the typical neo-liberal view about outsourcing, lowering labour costs, etc. Instead I would like to see more discussion about work sharing and that kind of labour market flexibility.
In the end, I would say that until the Europeans cut Greece loose, have banks fully account for sovereign credit writedowns, and recapitalise those banks, this crisis will get worse.
This post originally appeared on Credit Writedowns and is reproduced here with permission.