Solving the financial crisis the Swedish way, no more free loans for the bank owners
I have for a long time been frustrated by how European politicians, economists and journalists have been willing to turn private debt into public debt by having the European countries taking over the bad debts of the banks. Yesterday Anders Borg (financial minister of Sweden) and Carl Bildt (foreign minister of Sweden) published an article in Financial times on how Sweden solved it's banking crisis in the 90s (full article here). They are of course very polite but in essence they are essentially stating that the German-French-EU politicans are using the wrong tools when they are trying to solve the crisis and focus too much on saving share holders.
Their central thesis is that the solidity of the banks should be solved by equity issuance and not the unsecure loans that are currently creating bad loans that the tax payers will have to pay. If share holders are unable to raise enough money in this way, then the government will do so and demand shares according to their current market price. In the end this means that instead of bad loans, the government will own large parts of the banks that can be sold after the crisis.
They are also quite openly stating that the "stress tests" conducted by the EU are dishonest crap only used to lure the population into a false sense of security. Of course they are a bit more polite about it but if new and honest tests are required, then it's quite obvious that the previous tests weren't conducted in such a manner.To gain credibility from the markets and be accepted by our citizens, such a backstop needs to be guided by four principles. The purpose is to safeguard the financial system, not shareholders. Bank share purchases should be based on market prices reflecting the value of the failing bank in the absence of support measures, with "hair-cuts" if necessary. Prices should be determined after due-diligence from a third party. Second, when tax-payers risk their money, they should receive the potential upside of the investment. This is important in mitigating moral hazard.
Third, public capital injections warrant public control of bank management, including strict control of dividend policy, bonuses and salaries. This is vital to deter dangerous risk-taking and to ensure public support for using tax-payers' money. Fourth, the backstop should operate at arms-length from national governments without political involvement in commercial decisions.
Based on our experiences we believe several steps are now needed. The size of the problem must be addressed directly and openly. Hence, the European Banking Authority needs to carry out a credible and rigorous stress test identifying which banks need capital injections. Troubled banks should be subjected to a deeper third party assessment, like the one Blackrock performed in Ireland.
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Originally Posted by snuggans
I wish that figure was the real total. That could be managed?
Which has already seen huge sums pored into it with borrowed ECB funds at high interest rates to pay off the secured bond holders.
