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Senior Fellow Liliana Rojas-Suarez was interviewed by CNN en Español on the current debt crisis within Europe. In this interview she states her view that a banking crisis is highly likely within Europe. She notes that, in addition to the recent issues experienced by the French banks, many other European banks are struggling. As opposed to the United States, the problems in Europe started in the public sector and moved to the private sector; the banks, in particular. Also in contrast to the US, the European banks don’t have a full Lender of Last Resort (a function that the European Central Bank is not committed to pursue). Moreover, given the political disagreements within Germany, a TARP like program does not seem probable. In this context, banks’ recapitalization would need to take place with private sector resources, which are not forth coming given the low levels of confidence in European financial systems as the risk of contagion increases. For example, French banks have a large exposure to debt issued by Greece. At this point, if the ECB were to develop a deposit guarantee fund, Germany will have to provide the backing, which at this point looks unlikely.

Senior fellow Liliana Rojas- Suarez discusses the U.S. credit rating downgrade and its effects. She emphasizes that the fundamental problems behind the 2008 financial crisis – namely the deeply troubled mortgage markets - have not been solved, and that this downgrade, together with the ongoing European crisis, are indicative of an impending long period of very low global growth. Rojas-Suarez predicts that there will be no quick economic recovery for the United States resulting in stagnant growth and unemployment rates.

The American media is abuzz with stories of doom and gloom as tensions mount over stalled efforts to raise the U.S. debt ceiling. Europe, meanwhile, has its own debt woes, with mounting fears that a default in Greece could spill over into Ireland, Portugal and Spain. So far, however, there has been relatively little discussion about what these twin crises would mean for the 5 billion people living in developing countries. Sadly, those with the least influence over the issue could pay the highest price.

On this week’s Wonkcast, I invite senior CGD fellow and global finance expert Liliana Rojas-Suarez to explain why it’s important to the rest of the world that Europe and the United States put their financial affairs in order. The showdown in the U.S. is especially worrying, Liliana says, because of the U.S. dollar’s role as the international reserve currency.

 

Regulators at the Bank for International Settlements in Basel, Switzerland, are hard at work designing regulatory standards to avoid future financial meltdowns like the global financial crisis of 2008. Joining them for two months is Liliana Rojas Suarez, a CGD senior fellow and the founding chair of the Latin American Shadow Financial Regulatory Committee.

I spoke with Liliana just before she left for Basel about macroprudential regulation—an approach that focuses on the systemic risks arising from the interaction among banks and other financial institutions. (Liliana had spoken about this at a recent CGD Research in Progress staff meeting; her slides are a useful adjunct to our Wonkcast discussion.)