The Current Debt Crisis and the Possibility of a Banking Crisis in the European Union: Liliana Rojas-Suarez (interview)

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.