The European problems - another perspective

(DW-World) - We wouldn't be worried about Greece if the European banks had not overpurchased Greek debt. If the banks had been more prudent in buying all this sovereign debt the problem could have been solved a long time ago by just giving the bond holders a haircut. The whole trouble is that the bond holders are the banks or at least were until they were trying to divest themselves of bonds in recent weeks. To give a haircut to the banks might bring down the banking system.

I think the political story here is there has been an alliance for mutual gain between the governments and the banks. In this alliance for mutual gain the banks would buy up immense quantities of sovereign debt instead of lending to small businesses for innovation. They were not required to hold any capital against such assets and pressure was no doubt put on the ratings agencies to give all this sovereign debt a triple AAA rating. And this was also great for the governments and lots of governments took advantage that they didn't have to pay as high interest rates as they would otherwise have to pay. And they began borrowing a great deal. I think this alliance between the banks and the governments lies at the heart of the eurozone crisis. (Edmund S. Phelps is the 2006 winner of the Nobel Prize for Economics. Phelps is McVickar Professor of Political Economy at Columbia University in New York and Director of Columbia's Center on Capitalism and Society.)

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George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest

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