The Post’s View

Europe’s financial fog

LESS THAN 11 months ago, the Spanish lender BFA-Bankia passed the European Banking Authority’s “stress test” with flying colors. According to the firm’s July 15 news release, the results confirmed that “BFA-Bankia has excess capital which can be used to deal with any adverse scenario.”

By March, BFA-Bankia was hemorrhaging cash so fast that the Spanish government had to intervene, at a cost last estimated at $24 billion — and possibly rising. Investors in Spain and Europe and around the world fear that BFA-Bankia’s plight is just the beginning for a banking system still reeling from a quarter-trillion dollars worth of bad real estate loans; consequently, depositors pulled more than $135 billion out of Spanish banks in the first quarter of 2012, and the interest rate on the country’s 10-year bonds is approaching an unsustainable 7 percent.

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Spain’s plight could herald the financial implosion of Europe — and another disaster for the world economy like the panic that ensued after Lehman Brothers went bankrupt in 2008.

Certainly, the tale of BFA-Bankia illustrates a major cause of the region’s seemingly interminable economic predicament: a persistent inability to face facts and to act on them decisively. Greece triggered the crisis in late 2009, when it confessed to cooking its books to the tune of several percentage points of gross domestic product. Yet even after that, it was apparently still possible for the ostensible custodians of solvency in the financial sector to hand BFA-Bankia a clean bill of health.

This is the kind of temporizing that European Central Bank President Mario Draghi had in mind Thursday when he criticized European governments for repeatedly underestimating their problems, thus raising the ultimate cost of addressing them. The ECB has bent its rules to pump more than a trillion dollars into the banking system, but it is approaching the legal limits, Mr. Draghi warned. In words that may echo in the pages of history, he declared the euro common currency “unsustainable unless further steps are being undertaken.” He demanded that politicians “dispel this fog.”

Yet the fog thickens. Spanish Prime Minister Mariano Rajoy insists that his government does not need a bailout from Germany and the International Monetary Fund. The German government has opened the door to relaxing the budget-cutting timetable for Spain slightly, but Chancellor Angela Merkel is sticking to her mantra that there can’t be more financial integration in Europe (read: German bailouts) without a change in the European Union treaty.

The United States could deal with the Lehman collapse because this country already had centralized bank deposit insurance, uniform bank regulation and a true central bank, the Federal Reserve. Congress approved a bank bailout fund that was big enough — $700 billion — to restore confidence.

Almost all those instruments are lacking in Europe and would have to be improvised. There is a bailout fund, the European Financial Stability Facility, which has roughly $550 billion in lending capacity. But on account of German resistance, it is not authorized to recapitalize banks such as BFA-Bankia directly; it can bail out governments, in exchange for fiscal tightening.

To date, Europe’s leaders have been trying to muddle through the crisis; some have even suggested that muddling through is the best that can be hoped for. But Mr. Draghi is right: we’re reaching the point where politicians have to stop muddling and start getting through.

 
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