A Troubled Asset Relief Program for euro members is the region’s best bet for fiscal recovery following a Greek election that “didn’t really fix anything,” according to High Frequency Economics founder Carl Weinberg.
The European Central Bank can only keep banks liquid, rather than actually repair their structural flaws, Weinberg, chief economist at the Vallhalla, New York-based research firm, said in an interview today on “Bloomberg Surveillance” with Tom Keene, Ken Prewitt and Sara Eisen. This pushes the responsibility to prompt reform onto European Union Economic and Monetary Commissioner Olli Rehn, as well as the ruling bodies of individual countries, he said.
“The ECB has done everything it can do to help,” said Weinberg. “Now it’s up to Mr. Rehn and the governments of Europe to fix the banking system by recapitalizing it. We need a euro TARP.”
TARP was a $700 billion fund created by the U.S. government to backstop bank capital and financial institutions in the aftermath of the country’s financial crisis, which was caused by rising defaults on home loans.
It’s unclear who would fund this proposed TARP program, although it will likely be the people of Europe, Weinberg said.
“We’re looking at a very, very important drain on the savings of Europe to finance all of this,” he said. “All the banks of Europe are at risk, and at some point there’s going to have to be a bailout for them.”
A European TARP would indirectly affect the U.S. by adding uncertainty to its banking system, prompting the loss of some exports and causing overseas businesses in locations such as London to struggle because of counterparty risk, Weinberg said.
According to Weinberg, investors should steer clear of euro member bonds and focus more on securities issued by entities in North America and Asia, not including Japan. The false perception that Germany is “safe” has caused the bund to become overpriced.
The euro bloc is faced with the prospect of a deep economic downturn and is dealing with “very, very disorderly financial conditions,” Weinberg said. “Germany is embedded in the middle of euroland and Germany will sink with the rest of them if they don’t fix the banking system fast.”