4 Oct 2011

Geithner’s eurozone warning about “cascading catastrophe” is close.

Two weeks ago the US Treasury Secretary said something remarkable. “The threat of cascading default, bank runs and catastrophic risk must be taken off the table,” Tim Geithner warned the eurozone at the IMF Annual Meetings.

These threats are very much still on that table, right now. In fact, the near-nationalisation of the Franco-Belgian bank Dexia should really be the final wake up call.

Dexia had to be given assistance back in 2008 when the credit crunch first began. Now its back in the firing line – the problem is the losses it could sustain on its Greek loans. The French and Belgian governments today forced to guarantee its immediate funding. The likely long term solution – it will be broken up – the good bits sold, leaving behind a “bad bank”.

It all sounds very similar to what happened in 2008 in Britain. The fear is that Dexia is the first of many. The problem, that in 2011, the same epic transfer of banking risk from banks to states via government bailouts, will simply not be possible.

In fact there’s something of a pass-the-parcel of risk from banking sectors, to sovereigns, back to banks, and possibly back to sovereigns again.

At the core of this is Greece. It increasingly appears that the German view around sharper debt reprofiling, implying losses of 30, 40 or even 50 per cent+ for the bank holders of Greek debt (instead of the 21 per cent currently expected) is becoming the consensus. Loose but purposeful talk from the European financial ministers’ summit in Luxembourg seemed to suggest this.

But it is amazing to be showing leg on this without having a durable solution for the banks exposed to Greek debt. In Luxembourg, the Chancellor George Osborne expressed acute concern that the eurozone’s banks needed to be dealt with “now”. The only bit of strong leadership from the EU finance minister meeting was a concrete decision to not decide next week on a further €8bn tranche of Greece’s bailout. The decision will now been made in November, when Greece faces running out of cash to pay wages and pensions.

Yet more can-kicking. And all the while the risk of a catastrophic financial incident rising. The Geithner moment is here.