Eurobonds Can Save Europe's Banks
By Robert F. Engle, Michael Armellino Professor of Management and Financial Services and Director, The Volatility Institute
Jointly issued bonds used to recapitalize weak lenders would pay for themselves if the euro zone survives.
According to calculations using the NYU Stern Systemic Risk Rankings, a tool for tracking global financial risk developed at New York University's Stern School of Business, $2 trillion is the amount of capital that publicly traded banks and other financial institutions in the European Union's 27 member states would need if the crisis becomes as severe as 2008's collapse in global equities.
This is a big check. If it is written by Germany alone, it would more than double outstanding German debt and burden taxpayers for generations.
However, there is another way to calculate the price tag. Solving Europe's banking crisis will largely solve its sovereign crisis. The banks are insolvent in part because they invested in risky assets such as mortgages, and in part because of heavy investments in sovereign bonds, the value of which has declined dramatically as the crisis has worsened.
Read full article as published in The Wall Street Journal.