Banks are on a eurozone knife-edge

                                By Martin Wolf ------ from:  ft.com>comment>

We want to get away from them. But “developments in the euro area remain the key risk to global financial stability. Recent important policy steps have brought some much-needed relief to financial markets, as sovereign spreads[1] have eased, bank funding markets have reopened, and equity prices have rebounded.

However, new setbacks could still occur. The path ahead has significant risks, and policies need to be further strengthened to secure and entrench financial stability.” Thus did the International Monetary Fund’s Global Financial Stability Report assess progress towards what it calls, optimistically, a “quest for lasting stability”. Many would settle for[2] something far less ambitious: a few years of stability would be an unexpected delight.

The latest World Economic Outlook, also released last week, offers sensible recommendations: “it is critical to break the adverse feedback loops between subpar growth, deteriorating fiscal positions, increasing recapitalisation needs, and deleveraging[3]. The European Central Bank should implement additional monetary easing to ensure that inflation develops in line with its target over the medium term and guard against deflation risks, thereby also facilitating[4] much-needed adjustments in competitiveness. Moreover, banking authorities should work together to monitor and limit deleveraging of their banks at home and abroad.”

Let us summarise. First, it is still easy to identify risks, not least[5] the state of the banks, particularly given their close relationship with fragile sovereigns. Second, growth is too slow and ECB monetary policy too tight. Finally, inflation needs to rise in the more competitive countries, to facilitate adjustment among member countries. If the IMF is called to offer assistance to member countries out of the additional resources it has acquired, its conditionality for the eurozone needs to match these arguments. It is not enough to beat up weak countries. The policy regime[6] itself needs to change.

Yet, perhaps the most important point to have emerged is that the crisis is subject to growing political risks[7]. The fall of the Dutch government and the victory of François Hollande in the first round of the French presidential election demonstrate this point. The street might overwhelm the establishment. The fear of just this might cause yet another self-fulfilling prophecy of crisis[8]. Even France might be dragged in. Then the game might be up.

Encouragingly, confronted with the risk of a financial meltdown in late 2011, the eurozone did act. The ECB’s long-term refinancing operation reduced funding strains and contained the risk of bank failures. New governments in countries under pressure are implementing substantial reforms. Ireland and Portugal have made progress in their adjustment programmes. Greece has negotiated debt restructuring. Progress has been made towards surveillance of internal imbalances, not limited to fiscal imbalances. The eurozone’s “firewall” against contagion has been strengthened[9].

In short, the GSFR notes, downside economic risks have indeed been reduced. Unfortunately, it states, financial stability risks remain. A particularly important aspect of those risks is of further deleveraging by the banks. This is necessary, given their bloated balance sheets[10]. But it is economically dangerous.

The immediate priorities are clear, however: to give the countries in difficulty the time and the opportunity to adjust their economies and so achieve stability once more. My reading of the IMF analyses is that these countries are making painful progress. But far more must be done. Above all, growth must restart if the burden of public and private debt and the close links between such debts and the banks are to be managed. The challenge remains huge. Try even harder, for everybody’s sake.

一些难词或句子解释：

[1] sovereign spreads: spread是指“价差或息差”，这里sovereign spreads可以理解为“ZF债券的价差”。

[2] settle for: “满足于”。

[3] break the adverse feedback loops between subpar growth, deteriorating fiscal positions, increasing recapitalisation needs, and deleveraging：“打破增长欠佳、财政状况不断恶化与注资需求和去杠杆化不断上升之间的恶性反馈循环”

PS: 所谓的“去杠杆化”是指“一个公司或个人减少使用金融杠杆的过程”。

[4] facilitate:  “减轻···的困难”。

[5] not least: “尤其是，特别是”相对于especially。

[6] policy regime：“政策体制”。

[7] perhaps the most important point to have emerged is that the crisis is subject to growing political risks: "或许已经浮现的最重要的一点是：这场危机遭受了越来越多的政治风险"。

[8] The fear of just this might cause yet another self-fulfilling prophecy of crisis："就是这样的恐惧可能会导致另一场自我实现的危机的预言"。

[9]Progress has been made towards surveillance of internal imbalances, not limited to fiscal imbalances. The eurozone’s “firewall” against contagion has been strengthened: "对内部失衡的监控已经取得了一定进展，而不仅仅只限于财政失衡。欧元区繁殖蔓延的“防火墙”已经得到加强。"

[10] bloated balance sheets: "臃肿的资产负债表"。

The author shows us that banks are now on a dangerous side because of the Europe crisis. Although much have been done to save the financial markets, yet that is far from enough. He recommends that growth should restart to manage the banks.

We can see from the article that Europe's debt crisis, which makes many banks under pressure, is affected more and more by political sectors. Therefore, in solving the problem, a changed policy regime seems to be a must. On the other hand, the coordination between the 17 member countries in the Europe is still in the air, according to an economic global report. This should be the most emergent, I think. After all, harmony is the fundamental.