Sunday, April 17, 2011

Eurozone’s Zombie Banks

“Is a euro held in an Irish bank in Dublin, or in a Portuguese bank in Lisbon, as sound and secure as a euro in a German bank in Berlin?” asks Tyler Cowen in the New York Times .

“This apparently simple question holds the key to understanding why the euro zone may splinter and bring a new financial crisis.” 

Capital flight has already begun in Ireland and could also reach banks in other countries, transforming many euro banks into empty shells. They will require additional government bailouts, on top of the bailouts for the bad real estate loans, but the EU emergency loans cannot reverse the trend of shrinking economies and dwindling confidence.

“At this late point there’s probably no way to escape the mess by cutting government spending in the troubled countries. This year Ireland has a budget deficit of more than 30 percent of G.D.P., whereas in Portugal it is 8.6 percent. Even the best economic reforms can take many years to pay off with conrete results, and with zombie banks a turnaround is even harder and perhaps impossible.”

 This raises another “fundamental question … Why do we so often postpone admitting that short-run patches simply aren’t going to work?”

My suggested answer in a forthcoming book: because of powerful vested interests. 

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