In totally candid remarks, the head of the International Monetary Fund stated bluntly that banks throughout Europe must raise more money if we are to stave off a recession of global proportions. Christine Lagarde is also quoted as saying we are entering a “dangerous phase.”
Not only is Ms. Lagarde advising that more cash must be raised, she is also stating that we are on the verge of another credit crisis of epidemic global proportions. Her comments are geared towards staving off a liquidity crisis which could further weaken core countries, debilitating many of them in the process.
Her answer is recapitalisation to boost bank balance sheets throughout Europe which she sees as a way to inhibit the contagion of a debt crisis throughout the region. As she was speaking to the United States Federal Reserve at their annual forum, she felt that this recapitalisation should commence with the private sector but could be likewise funded with a bailout fund throughout all of Europe.
Recovery to date is on shaky grounds, ‘fragile’ as she calls it, and unless the world acts now it could derail the tenuous efforts which have been made thus far. The European, indeed the global economy is fragile and unless major steps are taken to bolster the progress already made, it is clear that we are headed for much bigger problems. She states that governments should be proactive as the risk of an epidemic recession is far greater than the risk of inflation.
Even though rumours are abounding, many banks have released statements denying they are experiencing problems with liquidity. On the other hand, even though Lagarde’s warnings are dire, only nine banks in the region failed the stress tests of the European Banking Authority in July. Both France and Britain received healthy scores whilst two Greek banks, five Spanish Banks and an Austrian bank failed by the EBA’s standards. Whilst this may not sound significant, there are still growing concerns that a recession just me be on the horizon.
