Tomorrow, the EBA will publish the results of the stress tests on EU banks at 5pm London, so there will be another 5 hours of US trading to see first market reactions. Over the weekend, analysts will have time to adjust the published data to allow for market pricing, rather than par, of government debt holdings. That would simply move the calculation of bank capital onto the basis of the haircuts that banks might “volunteer” for. Last week, Moody’s estimated that 26 of the 91 banks have a “heightened risk of needing extraordinary external support”. After this week’s decline in bond prices for many governments, that number is likely to rise.

 

After months of available time, press reports suggest that finance ministers are still unable to state that comprehensive support measures are in place. They will be organised “over the subsequent months – very rapidly”. Unfortunately, markets are now in a highly fearful state and the individual response of a bank is likely to be to cut credit lines to any counterparties that appear dangerously weak and not to have an immediate solution from a government that itself is not in need of support. Whilst right individually, this response is systemically disastrous as such liquidity crises build up with astonishing rapidity.

 

But this does not have to happen. As Roosevelt said in his 1933 Inauguration Speech "the only thing we have to fear is fear itself” and the eurozone is quite capable of taking the political and economic measures that will resolve this crisis and turn it round into a major boost to confidence and thus growth. In the attached article I have set out a 7 point plan which is economically simple and effective but politically profound.