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Eurozone debt crisis 'in dangerous new phase' warns IMF chief • Central banks to pump cheap dollars to European banks

• Lagarde says 'political dysfunction' could wreck recovery

Phillip Inman, economics correspondent

guardian.co.uk, Thursday 15 September 2011 15.52 EDT

International Monetary Fund head Christine Lagarde described a vicious circle of weak growth and weak balance

sheets fuelling a crisis of confidence. Photograph: Michael Reynolds/EPA

International Monetary Fund chief Christine Lagarde has warned that a "vicious circle is

gaining momentum" in Europe and the US that could wreck attempts at a recovery and

undermine rescue operations for Greece and other indebted EU countries.

She said "political dysfunction" was feeding policy indecision in a "dangerous new phase

of the crisis" that could make a delicate situation harder to resolve.

Her comments, most of which were directed at eurozone's chief policymakers, came as

the world's major central banks agreed to provide unlimited dollars to European banks

to prevent a rerun of the Lehman Brothers collapse three years ago.

The Bank of England joined the Bank of Japan, the US Federal Reserve and the

European Central Bank in a joint mission to provide dollars more cheaply than

international money markets.

Stock markets reacted positively to the initiative, with the FTSE up 2% at 5337 and the

German Dax and French CAC both up 3%. Banking stocks rose sharply, with BNP

Paribas up as much as 22%.

Many of Europe's weakest banks are expected to make use of the funds after finding

their access to dollar loans cut off in recent months. US institutions withdrew loan

facilities while the Greek situation remained unresolved, analysts said.





The European commission added to the gloomy outlook after it said the economic

situation would deteriorate towards the end of the year with growth slowing to a

standstill in the last quarter. It cut its 2011 growth forecast for the UK to just 1.1% from

the previous estimate of 1.7%.

Lagarde, the former French finance minister, repeated her warning that eurozone banks

vulnerable to a Greek default needed to boost their capital.

French banks have come under the spotlight following an unprecedented lending spreeto the Greek government and Greek banks. A default by Greece on its debts would leave

them with a large hole in their finances. Société Générale has a total exposure to Greek

government and commercial debts equal to !6.6bn (£5.7bn), and BNP Paribas has

!8.5bn, according to their disclosures to the European Banking Authority. Crédit

Agricole has a total exposure of !27bn.

Insurance policies sold by French banks in the form of credit default swaps (CDSs)

could also result in large losses. Many of the CDS contracts offered by French banks

have, in turn, been insured with other eurozone banks, which could be dragged into a

crisis by the need to honour these as well as absorb their own losses on loans to Greece.

Echoing analysts who argue the core problem for the eurozone is the lack of reserves to

buffer against loan defaults, Lagarde said there was a need for governments to increase

their support for the banking system.

"Balance sheet pressures are knocking the wind out of the recovery," she said. "There is

still too much debt in the system. Uncertainty hovers over sovereigns across the

advanced economies, banks in Europe and households in the US.

"Weak growth and weak balance sheets – of governments, financial institutions and

households – are feeding negatively on each other, fuelling a crisis of confidence and

holding back demand, investment and job creation. This vicious cycle is gaining

momentum and, frankly, it has been exacerbated by policy indecision and politicaldysfunction."

She added that while governments needed to cut their own debts this should not be at

the expense of growth, in a barely disguised warning to the US, the UK and other

governments with slowing economies that they risked social unrest without more

aggressive policies to tackle unemployment.

"I see a number of interweaving strands here – entrenched high unemployment,

especially among the younger generation; fiscal austerity that chips away at social

protections; perceptions of unfairness in Wall Street being given priority over 'main

street'; and legacies of growth in many countries that predominantly benefited the top

echelons of society. These issues add more fuel to the confidence crisis."

Analysts remained deeply divided over the fate of Greece and the eurozone. Some

argued the concerted effort by the French president, Nicolas Sarkozy, and the German

chancellor, Angela Merkel, this week to rally support for Greece and a second bailout

facility, combined with the actions of central banks, had calmed investors and bought

time for Greece to sort out its finances. Others said the efforts of the banks were a

sticking plaster for a situation demanding government action.





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Comments in chronological order (Total 14

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TedStewart15 September 2011 9:04PM

A crisis that requires bankers and politicians to work cooperatively

together to resolve.

What are the chances of that?

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mickyfong15 September 2011 9:18PM

"I see a number of interweaving strands here"

well hey Chris...good for you...but there's fcuk all you can do about it. This is bigger than

anyone can even comprehend...it needs a phoenix rising from the ashes but only after

it's all burned down first. innit

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Trevor Greetham, a fund manager at US investment firm Fidelity, said: "With sentiment

very negative we are seeing a strong positive market reaction to the central bank

initiative but liquidity action isn't enough to take us back into bull market mode. The

dollar move is a repeat of the joint action central banks took in December 2007, early on

in the last crisis. Liquidity support will not remove solvency fears as these relate to

Greek default and its possible knock-on effects.

"It's also worth remembering it is the slowdown in global growth over 2011 that is

putting increasing pressure on the European periphery and lead indicators suggest that

slowdown is still in place."





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MrShigemitsu

15 September 2011 9:19PM

A crisis that requires bankers and politicians to work cooperatively together to resolve.

What are the chances of that?

Very high indeed.

Politicians co-operate at all times with whatever bankers want them to do.

Recommend? (3)

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redmirror


These numbnuts have no idea what they are talking about. How many of them foresaw the 'Great Recession'? Zip. Enough said. I'll take my chances and wait for the sky to fall.

I don't trust one of them.

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Rangifer


A bank bailout in advance rather than a bank bailout after the event. It won't make any more difference to the ailing economies of the Eurozone than have any of the other

bailouts hitherto. Plus ça change, plus c'est la même chose, Madame Lagarde.

Recommend? (1)

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MooseFreedomFighter


utter manmade madness - pathetic that we can even solve our own made up crisis, we are very much doomed Capt Mainwaring !!!!

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MooseFreedomFighter






bet the rich stay rich and the poor get shafted

no change there then

Recommend? (2)

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AVoiceFromAmerica


Here we go again. Trillions for the banks - not one penny for the working person.

Recommend? (3)

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lostinmidwest15 September 2011 9:30PM

I know I am a bit dim, so somebody expalin to me why BNP, SG and CA simply don't

write the debt down, or off completely. They have numdreds of billions more in assets.

Sure their stock price would take a substantial haircut, but hey, thats that name of the

game: sometimes you make bad investment decisions and you pay a price. And it can't

have anything to do with capital reserve ratios since those assets (Greek sovereign debt)

are worthless anyway - unless we are all playing a game of lets pretend.

Recommend? (2)

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hydroxl


Generations of economists were taught in university that human beings are "rational

utility maximisers" and that is still the dominant theoretical assumption. The new field

of behavioural economics is still in its infancy and hasn't yet gained enough traction in

the economics community to affect monetary or fiscal policy.

But humans are self-evidently NOT "rational utility maximisers" ; they are social

animals, heavily influenced by passions, fears, fantasies, tribalism, and especially the

behaviour and emotions of other humans, especially in the aggregate.

This flaw is why economic models and predictions so often fail - because their core

assumption about their central agent - humans - is wrong. Anyone who regularly reads

business and investment news regularly sees headlines saying "Economists were

surprised" at [this or that], or "Unexpected increase" (or decrease) in [some economic

metric]. Everything takes them by surprise.

So it's a bit rich for Christine Lagarde to complain about political stalemates and

indecision. Get a clue, Christine, that's what humans DO. We are political animals; we





are social and emotional animals. Instead of idiotically expecting humans to suddenly

turn into a bunch of little robots to fit your "rational utility maximiser"; why don't you

and your fellow economists come up with models that describe the real world?

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theejudge


theejudge finds that they do not realise that the thing is broken.

Laissez faire is over just like communism is over.

The Neo Liberal dream of a world that converges on American capitalism is over.

A system that expects Greece to coexist on parity with Germany is a sham.

It is time to stop throwing our money into a black hole because it will not save Europe.

The European Union is finished !

Recommend? (1)

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theejudge


and the court bailiff forgot to say

all rise for thee judge

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superburger


"I see a number of interweaving strands here – entrenched high unemployment,

especially among the younger generation; fiscal austerity that chips away at social

protections; perceptions of unfairness in Wall Street being given priority over 'main

street'; and legacies of growth in many countries that predominantly benefited the top

echelons of society. These issues add more fuel to the confidence crisis."

nobody complained when their 2bed terrace was 'worth' 500,0000,00000.or they'd just put the 52" plasma on the credit card.

or were taking their fifth foreign holiday of the year.

An obvious boom was going on, yet we supposed to believe the 'Iron Chancellor' that

there would be "no more boom and bust!"

nonsense, of course, so why the surprise at the size of the crash?

and, when it all ends (as these things generally do) and the next boom starts again,

people will behave just the same.





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nishville


To paraphrase Douglas Adams, some of us think all forms of hypothetical money as

opposed to gold standard was a bad idea while there are those who even consider the

demise of bartering and the appearance of coins as a big mistake.

You cannot let go of the strict definition and tight control of something that represents

so much power when accumulated in vast amounts and expect that everything will go

just swimmingly.

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Eurozone Debt Crisis 'in Dangerous New Phase' Warns IMF Chief | Business | the Guardian

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