EU bolstering Club Med to fend off second banking crisis

EU help for Club Med nations is designed to give European banks enough time to minimise exposure to the region prior to debt restructurings, said analysts at a Fitch Ratings conference.

Banks are scaling back exposure to Club Med countries

Eurozone support for struggling Club Med nations is a stop-gap measure to allow banks to reduce their exposure to peripheral countries prior to any sovereign restructurings, said analysts at a Fitch Ratings conference on September 22.

Arnab Das, director of market research and strategy at Roubini Global Economics, said EU officials hoped to forestall a second – and potentially much more serious – European banking crisis, by propping up southern European sovereigns while financial institutions transfer assets “out of the South”.

Support measures for weaker countries currently include the European Central Bank’s government bond purchasing programme, and the European Stabilisation Mechanism loan facility, which Eurozone countries can access on demand.

Citi’s director of emerging market economics, David Lubin, said peripheral Europe faces a region-wide solvency crisis not seen since Latin America’s ‘lost decade’ 30 years ago, but no resolution could be sought until the banking sector has minimised its exposure to the area.

“The ability to reach a solution is limited by creditors’ ability to absorb losses,” he said.

Lubin added that one solution to the peripherals’ debt burden difficulties would be ‘voluntary’ debt reduction schemes similar to the Brady plan, which was implemented in 18 Latin American countries between 1989 and 1994, including Mexico, Costa Rica and Venezuela.

Under the plan, creditor banks forgave a portion – usually 30% to 35% – of a sovereign’s debt in exchange for new bonds, which were securitised by US Treasuries funded by the World Bank, the International Monetary Fund, and the Export-Import Bank of Japan. In return, debtor countries were obliged to implement market liberalisation policies.

“The Brady plan is an absolutely valid template for debt reduction in Europe,” said Lubin.