Bank worries bring echoes of 2008

 
Traders on the Frankfurt stock exchange Fears about eurozone debt crisis have led to heavy share falls inthe past two days

Just five days ago, international investors were considering the possibility that the US government might default on its debt. That fear, always distant, has now gone away. But it has been replaced by a lurking fear that world could be heading into another credit crunch.

We debated all this on the Today programme this morning, with former Italian Prime Minister Romano Prodi and the EU commissioner for monetary affairs, Olli Rehn.

Yesterday's fall in the US wiped out all of the stock price gains that American investors have enjoyed this year - that's $700bn in savings and investments in US equities, wiped out in a single day.

Asian markets have now lost most of their rise in 2011 as well - and European markets this morning are already down more than 3%.

Fears about the US recovery are a key part of the story - but it's the risks to European banks from the eurozone crisis that are causing most concern, and the comparisons with the summer and early autumn of 2008.

Robert Peston's latest post reminds us how that crisis started.

Policymakers have a better understanding now than they did then, of how easily funding problems for one country's banks can turn global. That ought to make it easier to prevent a repeat.

Most big banks are also now in a much better position to deal with a crisis than they were in 2007 or 2008. But governments - especially European ones - will have a battle to convince investors that the same applies to them.

Evan Davis asked Romano Prodi this morning whether Italy's problems were real - or a matter of confidence. The nub, of course, is that the euro is facing a crisis of both.

The immediate problem is that markets lack confidence that the European Central Bank (ECB) or any other European institution will provide the ultimate backstop for the eurosystem. If they had that confidence, such a backstop would not be needed and the crisis would not have happened.

But - as I described in my last post - the lack of market confidence has a real cause.

In reality, neither the ECB nor anyone else can credibly take responsibility for the single currency in the markets, or at least not yet. Because the 17 governments that decided to adopt the euro will not - and maybe cannot - promise that their taxpayers are willing to pay the consequences.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • Comment number 475.

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    Comment number 474.

    How many times did I hear Europeans gloat about their wonderful free medical care systems and their other free government benefits in their social safety nets. Guess what? It wasn't free after all. The bill has now come due all at once, payable on demand.

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    Comment number 473.

    461. bryhers

    'Government policy is higly relevant.I steers a course between competing alternatives like the speed and duration of debt reduction'

    I very much doubt there would be much difference if Lab were in. The rhetoric is convenient for Lab because they dont have to swing the axe. both parties are v similar. Just different pastel coloured ties. Condems are backpeddling at every opportunity

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    Comment number 472.

    460. bryhers

    'There must be something which blinded them from the inevitable while you were immune.'

    Private Debt is a straight line graph for the last 30 years and is 2x the 1930s in GDP terms. Do you seriously think nobody noticed that.

    I've got nothing against dustmen but when a dustman is walking around saying hes worth a fortune due to the ex council house he has bought & splashes money?

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    Comment number 471.

    460. bryhers

    'AD 432
    There must be something which blinded them from the inevitable while you were immune.'

    Yes. They believed they were in control. A great many people said before the crunch it was coming. Its all there, just take a look. Those in the system with concerns just could not see a way back. repeated actions where taken by banks to stretch the housing market BTL, self cert etc. Why

 

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