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Dexia has set alarm bells ringing, after Moody’s placed the Franco-Belgian banking group on review for a possible downgrade amid fears that the short-term funding on which it so heavily relies has dried up.
But the jitters over short-term financing are bigger than Dexia. The ECB should reject calls from those who argue they need two-year funding to have time to restructure their business models and deleverage.
Moreover, stretching liquidity to infinity and beyond is simply not the answer. A drought in wholesale financing is merely the symptom of a much deeper problem – the crisis of confidence over sovereign debt. The markets simply do not have faith that a divided and hesitant Europe will be able to meet the challenge of contagion should Greece default.
This raises too much uncertainty over where the inevitable losses will ultimately fall. The honest solution is for the banks to own up to all of their losses now. Failing that, it is up to Europe’s leaders to make them do it. Shock therapy is better than chronic paralysis.
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