It can be hard to weigh up the almost daily panics and rallies in the eurozone but things are extremely grim. In his column this morning, Allister Heath - Editor of City A.M. - writes that there "will be no sustainable solution to the Eurozone crisis without either a break-up or a dramatic acceleration in integration." Even when there are rallies, they are just the result of "desperate, short-termist bailout junkies" hoping for "more QE or taxpayers’ cash to bail out Spanish banks."
Leaders in the eurozone need to work out how to resolve the crisis. Unfortunately they will be very resistant to the radical action needed under the most economically realistic plans, like those set out by Neil Record. But the critical thing for Britain to do is to ensure our economy is as well prepared as possible for any trouble and that our banks know all they'll get is cold turkey, we can't afford our own bailout junkies.
The 2020 Tax Commission sets out a plan for the major reforms our economy needs so it can grow more strongly and make the best of whatever conditions the international economy throws at it.
But there is also the more direct issue of how to protect taxpayers from new bailouts if the banks get in trouble again. Last month Andrew Lilico, a Director and Principal of Europe Economics, wrote about an alternative so we can protect taxpayers from new bailouts. He set out a six point plan, which I've contracted here but you can read in full at ConservativeHome:
- No recapitalisation; no government loans or guarantees of loans to bust banks; no extension of deposit guarantees beyond what is already in legislation.
- Suspend formulaic capital adequacy ratio requirements. Once financial crises are in play, such rules are at best irrelevant (for markets may require higher ratios) and at worst highly counter-productive.
- Depositor liquidity insurance. Depositors do not run on banks because they have a rational fear of losing their money. Typical recovery rates for depositors, even in epic insolvencies such as the US bank runs of the 1930s, are in excess of 80 per cent. Depositors run on banks because they fear losing access to their money. Deposit guarantees only "work" in the sense that the larger they are, the more likely depositors believe it to be that governments will bail banks out (and evidence suggests they are right to believe that). What needs to be guaranteed is that depositors (including small and medium-sized business depositors) can continue to use their funds.
- Depositor preference. If banks are liquidated, depositors should rank ahead of bondholders.
- Debt-equity swaps. If banks have significantly inadequate capital or are insolvent but viable trading entities, they should fall into the hands of their bondholders - just as any other business falls into the hands of its creditors if it goes bust.
- Solvent institutions should be lent monies by the central bank. Central bank provision of liquidity to solvent institutions, at a penal rate, is not a bailout. It is what central banks exist for in a fractional reserve banking system.
We need to end the bailout culture. It produces terrible economic and political results and is impossible to justify to taxpayers struggling enough with the economic fallout from the ongoing financial crisis. There is a clear and credible plan for how that can be done, very similar to what both the British and European authorities themselves acknowledge is needed in the long run. The Government will have no excuse for bailing out the banks if the crisis worsens again.