Tuesday, July 26, 2011

In Greek Debt Deal, Clear Benefits for the Banks

New York Times
July 25, 2011

Europe's latest plan to prop up Greece looks suspiciously like a plan to bolster European banks.

By agreeing to contribute a relatively modest amount to the rescue, the banking industry is getting something more valuable in return, analysts say. The industry is unloading much of its Greek risk onto the European Union and helping to quash fears that the sovereign debt crisis could become a second financial crisis.

The agreement reached in Brussels last week may anger anyone who thinks that banks have already gotten enough taxpayer favors. But the debt crisis has always been as much about banks as it has been about Greece. If the deal helps restore confidence, weaker institutions will be able to borrow on money markets again, so they no longer will be dependent on the European Central Bank for financing.

“I think this is a good use of resources,” said Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. “This prevents the hit from becoming so large that it paralyzes the banking system.”

The oddity, of course, is that Chancellor Angela Merkel of Germany went to Brussels last week vowing to make banks pay their share of the cost of aiding Greece. She inadvertently seems to have done them a favor instead.


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