Here’s Why Investors Are Already Dubious Of This New European Bank Recapitalization Plan

Simone Foxman | Jun. 29, 2012, 5:22 AM

Business Insider

Wall Street has already begun weighing in with negative opinions on the new European deal to use bailout funds—the European Financial Stability Facility and the future European Stability Mechanism—to recapitalize troubled banks in Europe, despite the positive reaction we’ve seen in the markets so far today.

Morgan Stanley has criticized the plan as failing to take a “meaningful step forward.” The Bank of New York Mellon argues that this measure and others announced so far at the EU summit have failed to address continuing weakness in Greece. JP Morgan and Goldman Sachs have made similar arguments, predicting that the value of the euro will continue to fall.

Regardless of this angst, these new measures do indeed appear to be a positive development for banks, stemming interbank lending pressures that have threatened to upset stability in the euro area. But the main problem with the principles of the new plan is that it still doesn’t go far enough towards fixing the financial plumbing of the European area.

The plan is an attempt to temporarily reduce borrowing costs for Spain and Italy, which it is doing, at least temporarily.

But it doesn’t address one of the root problems in Europe, which is that the European Central Bank attempts to reduce countries’ borrowing costs by effectively coercing banks to buy sovereign bonds in a behind-the-scenes way.

Let’s briefly compare this to the U.S.

Read the rest of the article here: Business Insider

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