The eurozone sovereign debt crisis has now become also a banking crisis. Well, no surprise there. The cause of this is the recognition that Greece cannot pay back its debt in full. It has to have some debt written off - a process known as a 'haircut'.
The problem is that the losses will fall on banks and institutions that bought Greece's sovereign debt. Can they absorb the losses? So far two 'stress tests' have been undertaken and to the sound of howls of disbelief from the markets the banks passed them. Self delusion. The Dexia bank shambles is the pathfinder for other banks to follow, some outside the eurozone.
To overcome the problems Germany and France have been locked in a dance macabre. Germany insists that the European Financial Stability Facility should not be used from the outset to save a country's banks. A country should use its own assets first with the EFSF as a long-stop. France insists that the EFSF should be the first port of call in any bank rescue.
Either way, the banks are going to be bailed out with public money. It is the citizens who will suffer again. The moral of this is that the politicians make the people pay for the former's mistakes.
Below are some relevant links:
http://www.spiegel.de/international/business/0,1518,790865,00.html
http://www.spiegel.de/international/europe/0,1518,790954,00.html
http://www.spiegel.de/international/europe/0,1518,791007,00.html
http://www.spiegel.de/international/business/0,1518,790927,00.html
http://www.telegraph.co.uk/finance/comment/jeremy-warner/8818937/Banque-de-France-turns-a-blind-eye-to-European-financial-crisis.html
http://www.telegraph.co.uk/finance/financialcrisis/8819104/Key-eurozone-debt-summit-delayed-amid-political-deadlock.html
The following article summarises very well the dangers ahead.
http://www.telegraph.co.uk/finance/financialcrisis/8819195/German-push-for-Greek-default-risks-EMU-wide-snowball.html
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