For some time now, we are living in times when portfolio decisions are made by looking at nothing other than the wristwatch. This is one of those "all that solid melts into air" periods. Something is happening at every moment, making you jumpy. Consider yourself living in Turkey now. Syria on the south side of the southeastern border, increased PKK activity on the north side of the same border and there is the European banking crisis increasing tensions in global markets. Turkey, on the other hand, has structural vulnerabilities, becoming more visible every moment. Chilly? Definitely. Today let me focus on the deepening European crisis.
The deepening crisis in Europe was in the news last week. European crisis is a source of macroeconomic imbalance in our region. EU leaders are stregthening an imaginary Maginot line that is as useless as the actual historical one against the Germans in the WWI. Futile attempts on the part of the EU leaders, if you look at yesterday's Wall Street Journal claiming that "Fed officials are also concerned about the liquidity situation of European banks". Inaction of European leaders could be the excuse for a third quantitative easing (QEIII) in the US. Good opportunity for Ben Bernanke to be more active. "You know just to limit the negative impact of the deepening European crisis on the US banking system". We may hear about it shortly, just wait.
Why futile attempts on the part of the EU leaders? EU is still treating a banking crisis as a liquidity crisis. There is a hole in the banking system and everybody is wondering why all the water they are pumping into it is not enough to fill the bucket, the banking system, with water. It leaks, for God's sake! All the liquidity you are pumping tends to be hoarded with precautionary motives in somewhere else. Structural problems need to be addressed by structural measures. A banking crisis with holes in the balance sheet need to be dealt with banking recapitalization operations. Private actors, bank owners should also be part of the solution. That was where we were in Turkey in 2001.
Why Eurobonds as another attempt to strengthen the imaginary new Maginot Line? Under normal conditions, government bonds are national in the EU. With no fiscal union, everyone has her own risks. But European Central Bank as an EU institution has supranationalized the government bonds of Greece, Portugal, Spain, Italy, etc. Now EU takes over the risk, and can directly issue Eurobonds to support banks. But it is not enough. Two things missing if you ask me: Firstly, you need to use those bonds properly, for banking recap, not for more muddle through operations. Secondly, with EU Eurobonds there is the need to be a fiscal union, national budgets becoming more technical and less political documents.
So many years after Magna Carta, this is something new. Kind of a quantum leap for today's European politicians. And there are so many elections looming ahead in so many core European countries.
So wait for the Bernanke move. Let's have QEIII for Europe's sake.
This commentary was published on 20.08.2011 in Hürriyet Daily News.
