The Eurozone’s politicians have been very hesitant to scrutinize banks’ balance-sheets and even more reluctant to force banks to start cleaning up the mess. Mario Draghi, the president of the European Central Bank (ECB), announced this week that he intends to end this travesty and launched an initiative to inspect the balance-sheets of the region’s 128 biggest banks in order to impose common standards for loan quality and find out which banks are viable, which will need more capital and which should just be closed down.
Contrary to conventional wisdom, The Economist asserts that, although Europe is admittedly in the grips of a sovereign-debt crisis, the principal cause of the Eurozone financial tragedy are less to blame on the recklessness on the part of governments than on excessive private borrowing encouraged by banks. A look at mortgage debt in Ireland and Spain as well as corporate borrowing in Portugal and Spain shows that efforts to reduce the private-debt burden in Eurozone Member States have achieved far less deleveraging than in the United States. And why? On one hand, in the peripheral economies, it has been difficult to reduce private debts because of the fiscal austerity that has been imposed. And on the other hand, underperforming banks have been reluctant to take measure to deal with non-performing loans. And last but not least, European bankruptcy law tends to be less conducive to restructuring debt than in America.
So what’s next? If the Eurozone’s economy is to recover, the burden of the private debt must be lightened. Besides reducing austerity, the ECB’s asset-quality review will be crucial to help banks comply with the recognition and writing down of non-performing loans. Disposing of non-performing loans and reforming bankruptcy and tax laws should make it easier to restructure corporate and personal debts and ultimately pave the way for the implementation of a banking union with better capitalized banks.
Read the full article in The Economist.