Geoffrey Smith in the Wall Street Journal documents the build-up of the capital reserves with European bansk since the fall of Lehman Brothers in 2008. His article notes that a Greek default is unlikely to send any European bank into freefall. From a restructuring perspective, a Greek default will not cause significant problems for reserving in the European banking system.
The European Central Bank and its political bankers have consistently defended the system of bail-outs designed to prevent any default or debt restructuring in the PIGS. Their fear is defined by the experiences of 2008. They perceive the financial system to be too fragile for any further crisis of confidence, though this is an essential bug of market psychology. The sovereigns of the Eurozone are bucking the market. Josef Ackermann of Deutsche Bank exposes this fragility:
“The losses in many areas would be too high and could provoke a contagion impact,” Ackermann said in an interview...
Greece cannot pay back its debts. If this truth is recognised, then banks may systematically fail, due to the risk of 'contagion', requiring further sovereign bail-outs and increased debt. Therefore, Greece must crucify itself to avoid this risk. As a story, it sucks. If 'contagion' from a confidence sapping event is that powerful, then the system will fail, as night follows day. If it is not inevitable, then pretending that a problem does not exist and extending its duration, may perversely bring about the outcome that the strategy was meant to avoid. The problem grows over time.
Europe is not yet allowing its bugs to go splat! That day will come!
