Cameron recognises the eurozone problem – but too late for Dexia

David Cameron today gave an interview with the FT (£) in which he laid out his understanding of the eurozone problem, and his solutions to it.

He accepts:

“The situation with the world economy is very precarious, [and that] the eurozone is probably contributing more to that uncertainty and lack of confidence than anything else.”

The prime minister also expresses his concern eurozone countries will not quite rise to the challenge, and understands why, for instance, German voters are reluctant to put more money into propping up Greece, saying of Angela Merkel:

“In a time of crisis you have to do the right thing in order to deliver what – I think – German politicians and Germany really wants, which is a working eurozone.”

Much of the interview was spent defending the perceived weakness of RBS, especially when confronted with the plans for a European bank stress test.

He is confident RBS will not need more than the £45 billion it’s already received from the Exchequer, but as the FT points, out it remains one of five blue-chip European banks whose core tier one capital ratio risks falling below the level that may be demanded by the EU to restore confidence in the broader European banking system.

Mr Cameron’s policy suggestions remain vague, but the FT either charitably reworks them, or puts words into his mouth, in its leader (£):

As David Cameron says in today’s FT interview, at least three steps are needed to end the immediate crisis. First, leaders must take the Greek problem decisively in hand. Aid to Greece should continue, subject to strict conditions.

But a debt swap should write down private investors by much more than currently envisaged, in return for longer-maturity Brady-type bonds backed by eurozone collateral. Without cutting the debt overhang there is scant hope of fresh flows of market finance ever reaching Athens.

Second, contagion to other sovereigns must be stopped. The greatest imminent risk is a funding crisis not for small peripheral countries, but for Italy.

The eurozone has the means to build a firewall in the form of the European financial stability facility – if the rescue fund obtains the new powers it was promised in July, and if it is leveraged up to several trillion euros. Short of that, the European Central Bank will have to continue buying Italian bonds.

Third, governments in and out of the eurozone must prevent a banking meltdown. This is possible only if the sovereign crisis is brought under control. Bank rescues must not divert resources from protecting sovereign liquidity.

The best Europe can do for banks is to subject them to credible stress tests and force more capital on the weakest. France should take note.

The latest challenge the eurozone faces is the French, Belgian and Luxembourgish bailout of Dexia, a Franco-Belgian bank. Although the €90 billion provided by the three countries over the next three years should be enough to keep the bank afloat, its assets equal 140 per cent of Belgium’s GDP (£); if it does go down, it will take a multinational effort to protect its creditors.

As Anne Jolis reports:

“The Belgian government can’t default! If the Belgium government defaults, every government in the euro zone defaults. You’d see the breakdown of the entire capitalist system,” [says the manager of her branch of Dexia].

Which is why the sock drawer is starting to look like such a good option.

See also:

• Judgement day approaches for the eurozone – Ben Fox, September 28th 2011

• Look Left – “Six weeks to save the euro” warns Osborne – Shamik Das, September 23rd 2011

• Time to move beyond the eurozone – Barry Gardiner MP, September 21st 2011

• Mandelson: Time to “stand up, win the argument, act decisively and lead” on the euro – Shamik Das, September 20th 2011

• The euro lurches towards the abyss – but does the Left have a Plan B? – Ann Pettifor, September 14th 2011