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Jul 12, 2012, 08.23 AM IST
CNBC-TV18’s banking editor Latha Venkatesh discusses with Hitendra Dave of HSBC and Paul Mortimer Lee, economist from BNP Paribas various perspectives on Europe, the global markets and the Indian econnomy.
On this edition of Indianomics, CNBC-TV18's banking editor Latha Venkatesh discusses with Hitendra Dave of HSBC and Paul Mortimer-Lee, economist from BNP Paribas various perspectives on Europe, the global markets and the Indian econnomy.
Below is an edited transcript of the discussion on CNBC-TV18. Also watch the accompanying video.
Q: Can you tell us what will be the exact impact of capitalising the banks directly and not through the sovereigns? Is it not possible that if these banks buy debt of their sovereigns, they will continue to need capital from the ESM? So are you differentiating or wrenching the banking problem from the sovereign problem?
Mortimer-Lee: It is the interrelationship between the two that matters. The banks buy the debt to prop up the sovereign while the Spanish issues debt to try and prop up the banks. You have to break that interrelationship which is a vicious spiral. The EU announcement is a very good measure that the market expected. So this is a step in the right direction.
Q: Will this create a problem if debt gets downgraded and increasing dollops of capital have to be given to banks? How long will you support the sovereign from the general pool, the ESM and the EFSF?
Mortimer-Lee: To the extent that the banks are holding the government debt in their trading books. If they are holding it in their banking books, they don't have to mark it to market, so downgrades don't directly affect their capital.
The real damage to the capital of Spanish banks was the lending that went on during the Spanish housing boom and that is the key threat. That is why they need more capital now to provision against those losses which are not materialising at the moment.
But that is likely to be provisioned against in the next few years and this will bolster the Spanish banks. How much of Spanish debt will be allowed to be bough when the ESM is the shareholder, I don't know .
At the moment, the Spanish central bank as supervisor can strong-arm the sovereign to buy too much Spanish debt. If the ESM is the shareholder, they maybe use such strong-arm on tactics and infact they may buy less Spanish debt than they would have done otherwise.
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