Four rescue measures for stagnant eurozone - FT.com - 0 views
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Four rescue measures for stagnant eurozone
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The EBA has a long record of stress tests that grotesquely underestimate the capital holes in EU banks.
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Both the AQR and the stress test relied heavily on national regulators and supervisors – the very entities on whose watch the excesses that led to the financial crisis were allowed to fester and compound.
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They were in charge of the regulatory leniency that permitted the banks in their jurisdictions to engage in lender forbearance (extend and pretend/delay and pray) and to overstate the fair value of their assets.
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To avoid the cyclical stagnation in the eurozone turning into secular stagnation, four policies are required.
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he first is a proper AQR and stress test followed by a speedy recapitalisation of the capital-deficient banks and a wave of consolidation in the eurozone banking sector to bring higher profitability
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The second measure is a temporary fiscal stimulus (say 1 per cent of eurozone GDP per year for two years, concentrated in the countries with the largest output gaps, that is, in the periphery), which is permanently funded and monetised by the ECB.
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this will be a reminder that the most important asset of central banks – the present value of future seigniorage profits – is off-balance sheet.
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Finally, to achieve debt sustainability for the eurozone sovereigns, radical supply side reforms are required that boost the growth rate of potential output to at least 1.5 per cent in Italy, Portugal and other sclerotic countries.