Is the first bank to fall victim of the Euro debt crisis a sign of worse to come?
Introduction
The news that the Franco-Belgian bank, Dexia, is in financial trouble appears to have concentrated the minds of the Eurozone politicians who are fast forwarding a plan to recapitalise the banking sector. Public pronouncements by leading European politicians, including Chancellor Merkel of Germany and the President of the European Commission, Jose Barroso, have led to a surge in optimism in markets that a credible plan will be announced soon. This comes only a few months after the European Banking Authority (EBA) conducted its own stress tests on the banking sector which gave it a clean bill of health with a few minor exceptions (incidentally, Dexia was rated the 12th strongest bank out of the 90 tested by the EBA). The volte face reflects the belated realisation that the tests, as were the ones in 2010, were a whitewash that overlooked and underestimated the current financial stress in the Eurozone that has recently spread to the banking sector from the sovereign states. Dexia is the first manifestation of this increased stress and the question now is whether this is a harbinger of events to come or whether the collective action of the policy makers can contain the growing crisis through an ambitious bank recapitalisation plan, as the US achieved with its troubled asset relief programme (TARP) in 2008.
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