Towards massive debt restructuring in the Southern countries ?
There is also the problem of growing consanguinity between banks and States. To truly understand this issue, we have to realize that, day after day, public debts re-migrate towards their countries of origin. The Euro permitted European States to access sources of funding that used to be inaccessible, for the change risk disappeared in the Eurozone and European interest rates aligned with German ratings.
The sovereign crisis has made an end to these happy years. It also revealed that the public debt mixing aggravated the systemic risk, i.e. the risk of monetary implosion, a bit like when the first attached climber pulls along all the others in its fall. For this reason, the ECB lend money to the banks of the weakest countries, so that they buy the debts from their own countries back. It’s in this way that Spanish and Italian banks have bought the debts back from their own States, which used to be controlled by foreign investors.
What is the foremost effect of this public debt renationalization, which can also be observed in Belgium? It puts the banks in a situation close to state control, for the States are henceforth bank guarantors, shareholders and borrowers. It implies a situation of financial repression destined to canalize private person savings towards public debt financing through the banks. But this is not all: for certain States have to be financed by the ECB, the latter will henceforth play a role of bank supervisor. Bank control goes from a prudential and national to a monetary and international level.
When we juxtapose all these measures, a frightening reality overcomes us: while the majority of European banks are solvent and sturdy, the States progressively use them to finance their public debts. This is aggravated by introducing bank supervision, orchestrated by the ECB. The whole (private and public) monetary creation circuit is moving closer towards state control. This to the advantage of bank depositors, the deposit security of which is guaranteed.
However, in the blind zone of this state control, we find the shadow of a very serious peril. Bank state control, combined with public debt redomestication, timidly opens the door to massive restructuration (i.e. rescheduling) of these very same public debts in the weak countries.
When looking further ahead than the immediate future, we should ask ourselves two questions.
On the short term, we should wonder about the role of the ECB, which will inevitably have to inject massive money amounts to finance public debts with untenable levels. It’s the only means to start erasing four decades of public debt excess.
On the mid-long term, it comes down to knowing whether the Eurozone is still viable, optimal and/or desirable and whether its permanent re-oxygenation is useful, while rejecting of a true budgetary and fiscal union. I don’t think so.
However, if we turn towards an intact monetary zone without inflation, nor massive monetary creation, we will have to accept that the public debts of certain Mediterranean countries are massively redirected. This redirection will take form under the rescheduling or default, following the Greek scenario.
