Hindering growth

The investment markets have reacted euphorically to the agreements reached at the Brussels summit, principally in response to the increase in the stability fund to one trillion euros. But the outcome of the overnight meeting raises more questions than it answers, along with a number of dubious decisions that cast doubt on the seriousness of the mechanisms of financial analysis in Europe. The decision that has been unanimously praised (the increase in the stability fund), is without doubt, the right one, and will help to dampen speculation on sovereign debt. However, putting more money into the fund will not change the reality that Europe needs a new institutional framework in the form of a euro treasury, in the same way that the US Treasury guarantees the stability of the dollar. Increasing the fund is fine, but as Angela Merkel has admitted, it is not the definitive solution.

But the recapitalization requirements agreed by leaders make no sense at all from a financial perspective. There is simply no reason why Spain's banks, which this year alone have fallen 15 percent on the stock exchange, need to recapitalize to the tune of 26 billion euros, while France's banks, which over the same period have shed 50 percent of their value on the bourse, need just five billion. The same can be said of Germany's lenders. Are investors wrong when they point out that Greek bonds and other toxic waste held by German and French banks puts them in a worse situation than their Spanish competitors? No.

But as the correct measure to counter the damage caused by the debt crisis in each of Europe's banks would bankrupt some of the Franco-German axis' major financial institutions, the summit, with the backing of the European Banking Authority, opted for universal recapitalization through the bizarre method of allowing German banks to sell risky and non-essential assets and retain profits instead. It is worrying that decisions of this caliber can be taken on the basis of such irrelevant instruments as stress tests, to which a relatively higher number of Spanish banks were subjected.

The problems in Europe's banking system will not be resolved through the artifice of recapitalization. Banking casuistry shows that most of the time, the problem is not debt, the only criteria applied by the European Council, but toxic assets that are blocking up the balance sheets and preventing the flow of credit. In the case of Spain, it is easier to understand the question by remembering that 70 percent of risky assets are tied up in real estate, and that this risk is only 28 percent provisioned for.

It is unrealistic to suppose that it will be easy to implement the recapitalization required by Brussels. Some banks, such as Santander and BBVA, will find it less difficult, but others, notably savings banks recently converted into banks, will find it hard. It is even less realistic to imagine that these core capital requirements will not tie up credit yet further. The burden will be passed on to small-loans customers and it will further delay economic recovery.

Furthermore, the Brussels summit has failed to tackle the need for economic growth. It didn't even touch on the question. It resolved the problem of Greek debt by slashing half of it, seemingly provided a way out of the banking crisis that has hit Spain's growth prospects hardest, and left the job of creating a new institutional framework half done.