Minutes of the Riksbank’s July 4 policy meeting, published today, see deputy governor Lars Nyberg become the latest central banker to lambast the eurozone authorities over their handling of the Greek crisis. From the minutes:
Economically it would have paid off to find a solution to the Greek crisis a long time ago, given the costs in the form of less efficient markets and falling stock markets that the uncertainty has led to. However, Greece is now part of the euro area and this means that the crisis must be resolved politically and at the European level. Mr Nyberg noted that the European mechanisms for resolving crises do not appear to work particularly well.
Financial market investors are wondering, and justifiably so, how a crisis in a larger country could possibly be managed if it is not even possible to reach agreement on how to deal with Greece.
Quite. Because of this, he says, “a relatively minor economic crisis may quickly become a major political crisis”. (Note that this was before events in Italy took a turn for the worse.)
A failure to deal with the situation in Greece would probably lead to serious and lasting uncertainty on the financial markets in Europe. Investors will expect the problems evident in a number of countries to worsen and they will lack confidence in the ability of the political process to deal with them.
Mr Nyberg said it was “highly unfortunate that sovereign debt problems and bank problems are so closely interlinked.” This, he said, “relates to the fact that many European countries have not yet, either by private or public means, been able to capitalise their bank systems following the crisis.”
The risk is that a number of member states will once again have to intervene to capitalise parts of their banking systems using tax revenues. Some of the countries have credible backstops available, others unfortunately do not. This of course constitutes a further uncertainty factor to add to all the others.
All of which is in line with Sir Mervyn King’s diagnosis that the eurozone crisis is one of solvency, not liquidity.
Stefan Ingves, Mr Nyberg’s boss, said he agreed with his deputy’s “sound analysis of the situation in Greece”, though he pointed out that in northern Europe there are countries that are growing at a relatively good rate.
Like Sir Mervyn and the Czech National Bank’s Miroslav Singer, Mr Ingves is due to meet with other EU central bank governors on 21 September when the general board of the European Systemic Risk Board next meets. Oh to be a fly on the wall…