Europe’s mounting debt crisis is unlikely to lead to a widespread collapse of banks, according to George Magnus, senior economic adviser to UBS Investment Bank in London.
“Whilst that was a big shock in 2008, a lot of things have changed,” Magnus said in an interview with Francine Lacqua on Bloomberg Television today, referring to the collapse of Lehman Brothers Holdings Inc. “I don’t believe we are going to have a banking meltdown,”
European bank shares tumbled to the lowest since March 2009 yesterday, led by Societe Generale SA, amid concern that France’s creditworthiness was in doubt. Magnus, who correctly predicted in 2007 that the U.S. subprime mortgage-market collapse would spread to the global economy, said that it “beggars belief” central banks would allow another major bank failure.
European stocks pared earlier gains, with the Stoxx Europe 600 Index up 0.3 percent as of 12 p.m. in London. It had risen as much as 2.7 percent. Shares of Societe Generale SA, France’s second-largest bank, slid 4 percent, extending yesterday’s 15 percent plunge.
Magnus said the recent market turmoil was a reaction to a perceived lack of political leadership as European governments struggle to prevent the debt crisis from spreading.
“This is not just fear of low growth, this is about fear that nobody’s running the shop,” Magnus said. “It’s really an issue of political leadership. It seems like the market has thrown up its hands and said, ‘well who’s going to do what, who’s in charge?”
The European Central Bank was forced to step in this week, buying Spanish and Italian bonds to push down yields on the countries’ debt. Bank of England Governor Mervyn King said yesterday that the ECB is at the “outer limit” of its powers and governments must take over.
“There’s a serious risk that this malaise will continue to chip away at market confidence,” he said. “Within the next three, four, five months if nothing happens the crisis in Europe will reach a new crescendo.”
Societe Generale Chief Executive Officer Frederic Oudea defended the bank against speculation that a deterioration in France’s creditworthiness would damage the company’s stability. Speculation about the widening sovereign-debt crisis pushed the cost of insuring France’s government debt against default up about 54 basis points this month to 176.3 basis points, prices from data provider CMA show.
“We’ve got to be able to try to make sure that money markets don’t freeze up,” Magnus said. “The ECB clearly has a very important function to play there.”
Magnus in July 2007 warned that the U.S. subprime mortgage-market collapse may not be “containable.” In September 2008, he called for the U.S. Federal Reserve, the European Central Bank and the Bank of England to cut interest rates to prevent the financial crisis from worsening, a step they took two weeks later.
The euro region is facing “much more than just a liquidity crisis,” he said.
“The prevailing wisdom for the moment is that governments either can’t or refuse to act,” he said. “At this level this is really about confidence and about politics and fear.”