Banks: 'Too big to fail, too big to save'

A devastating article in the FT by the former chief restructuring officer in the US Treasury, Jim Millstein, provides a nasty wake-up. He suggests that the “symbiosis” between government debt and bank assets is so great that Europe’s banks have become too big to fail. “Insolvency of one threatens insolvency of the other”, he writes.

Millstein warns that ultimately, European governments will have to abandon their implicit guarantees to the banks in order to protect their own solvency.

‘Death spiral of interdependency’

This is the vast spectre that we are finding it so hard to quantify and hence report.  Millstein warns that European banks are now ‘too big to save’, and that in order to escape what he calls this “death spiral of interdependency”, the bank/government interdependency will either fracture, or be fractured by events.

Into this morass comes Angela Merkel, speaking yesterday at her CDU party conference in Leipzig. The German Chancellor has jumped. Her jump is toward deeper political union. This is the perhaps first step in persuading her people that they will have to play their part in the costly re-structuring of Europe.

On cue, Britain’s Prime Minister, David Cameron has jumped. He has jumped the other way. Speaking at precisely the same moment as Mrs. Merkel, he tells the City that this is the time for EU powers to go the other way – back to constituent governments.

EU tug-of-war

This dangerous tug-of-war is now in play in earnest. Perhaps the crashing of banks is what we can now see on our Christmas horizons; perhaps a Federal Union that lashes Germany to filling the rest of the eurozone’s coffers.

Who can tell in this moment? But I sat next to a prominent banker at dinner last night. He’s a man I trust. His bank may not be in the line of fire – but he knows an awful lot which are.

Hang onto the railings, the winds out there are mighty strong. Does Chancellor Merkel mis-speak when she tells her party: “this is the worst crisis since 1945”?