- Josef Marbacher, Professor of Banking and Finance at University of Applied Sciences North-western Switzerland and a former economist at the Swiss National Bank
After the Franco-Belgian Dexia bank's shares record plunge by 38% on 10 October, the Board of Directors has approved of its "healthy" units sale to the Belgian government and confirmed the receipt of EUR 90 billion worth guarantees for the remaining "bad assets" of the bank provided by the governments of Belgium (60.5%), France (36.5%) and Luxembourg (3%). Dukascopy Bank SA has interviewed an expert in banking, Dr. Prof. Josef Marbacher and found out his exclusive opinion on the Dexia bank's recent bail-out.
1) Belgian and French taxpayers are compelled to make the second bail-out of the same bank in 3 years. In your opinion who should they blame: regulators that in 3 years couldn't improve faulty risk policies of the bank; Greek and Portuguese bureaucrats that have exposed their countries to default or there may be other candidates?
My argument on this matter is that the banks did not have enough time to do their job. For that reason, in most countries it was decided that recapitalization was crucial and that it was such an enormous process that banks must have at minimum 5 years' time for it or even more.
The stability of the banking system came at risk together with the jeopardized business cycle; hence, to escape the depression there has been a number of programmes carried out to fill the gaps in the consumption and investments.
Nobody assumed two years ago that the second crisis in the capital market would occur once more. This happened exactly because the countries had to pay for the banks. The deficit rose sharply from average of about 60% of GDP to 90%. Naturally, the investors claim that it is too much, especially in the southern Europe, in the periphery.
Nevertheless, it is difficult to blame any institution. Even the regulators in the troubled Euro zone states did everything they could.
2) Dexia's CEO Pierre Mariani said that management's mistake was to agree too easily to governments' requests that the bank maintains its exposure to Greece. This resulted in huge losses for shareholders. Do you think that this is a new unique model of solving sovereign problems at the expense of European banks' shareholders? How sustainable can it be?
A number of banks (8 at minimum) are in a similar situation as Dexia Bank SA, "full with papers" from periphery. Consequently, there is an extreme risk that a chain reaction will take place.
I see that there is no other choice than writing down the debts, especially the debt of Greece, by recapitalizing the banks. Otherwise they would lose so much capital, that they would struggle in the future to gain the lost confidence in the market. The market, in its turn, is notifying which securities are worthy, particularly concerning Greece.
3) Dexia's rescue is taking place only 3 months after widely advertised EU regulators' stress tests. Does this case highlight the general weakness of the stress tests and their initial 'marketing perspective'?
I believe that the concept that was chosen for the stress tests is not improving confidence. In my judgment, the regulators assured that they would manage the difficulties with the periphery's securities, emphasizing that it is time that would play a great role. However, the market's reaction is obvious: it cannot wait for long and requires the solution to the problem now.
Therefore, stress tests were designed to exclude the problems concerning government securities. Instead, their methodology was to analyse market risks in the management or business models of the banks, thus evaluating the shocks that could come looking from other angles outside the government securities field.
It is clear that uncertainty is very critical for business cycles, consumers and investors. That is exactly the risk that is being run if no adequate action is taken in the arena of sovereign debt crunch. Therefore, I fully agree with IMF who says that first the recapitalization of the banks has to take place and then writing down the securities should follow. In that case, there would be no crisis 2.0. This argument makes sense because we have no chance to let banks go bankrupt as it would be disastrous for the whole Euro zone economy.
Furthermore, I must admit that there is another trouble: an extremely high government debt. As we know, the write-down of the sovereign debt will be implemented by raising the debt level which is a little bit of a problem. This means we have not fully solved the whole problem. We have solved it so far in such a way, that there is more debt in the core countries, meaning that the risk is shifted from the southern countries to core Europe.
However, I would say that it is not critical. Of course the taxpayers will pay for it and the major Euro zone countries, such as Germany, France, Austria, Finland, etc. would have a slightly higher risk-premium, but perhaps it is not so important. Nonetheless, these states must be ready to do it; there has to be more solidarity and political will to bail-out the other countries debt. It is natural that the shareholders will lose in this case as they had invested their money in the risky portfolios, therefore, they also must pay parts of the bill.