Draghi: ‘please don’t destroy Europe’s banks yet again’

The Telegraph -

El Pais has obtained the devastating letter by the ECB’s Mario Draghi warning Europe’s authorities not to set off yet another conflagration with one their serial idiocies.

As you can see, the wording leaves no doubt that punitive haircuts (however tempting) and a full-blown assault on junior bank debt could lead to a “flight of investors out of the European banking market”. The neuralgic issue is the new drive for forced conversion of sub-debt in what they call “precautionary recapitalisations”.

Ex-ECB board member Lorenzo Bini-Smaghi warns that escalating attacks on bank creditors is a repeat of the infamous Deauville “walk on the beach” by Merkel and Sarkozy, the deal that led to enforced losses on sovereign bondholders in Greece (in violation of earlier pledges that this would never happen), and shattered confidence in EMU sovereign debt markets, with consequences that soon became obvious.

Draghi says the ECB’s bank stress tests early next year will degenerate into a fiasco or worse unless EU leaders put in place “credible public backstops” to cover cases where there is not enough money from private investors to recapitalise the banks.

The whole botched structure “may very well destroy the very confidence in euro area banks which we all intend to restore”

A note by S&P today said Europe’s banks still had a funding gap of €1.3 trillion at the end of 2012 and most of this remains, so the financial system is not out of the woods by any means. Bad debts in Spain keep hitting a fresh record each month. The shortfall could be large.


Read More: telegraph.co.uk



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