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People's Daily Online>>Opinion

Be wary of financial risks in Europe

By Liu Mingli (Guangming Daily)

15:40, October 10, 2011

Edited and Translated by People's Daily Online

European banks that held large amounts of Wall Street's "toxic assets" suffered huge losses during the global financial crisis in 2008 and have not yet fully recovered. Certain European countries have adopted a self-deceiving attitude to maintain market confidence and prevent financial collapse.

While trying to conceal the actual losses of the banks, the European Union conducted two stress tests of its banking sector and let most banks pass the tests. However, as the debt crisis continues to deepen, the bloc is under heavy pressure and seems unable to cover up the losses of its banking sector.

On Oct. 4, the governments of France and Belgium, joint shareholders in the troubled bank Dexia, announced plans to split up the bank, which became the first European bank to fall victim to the debt crisis. Many media outlets have compared the breakup of Dexia to the collapse of Lehman Brothers in 2008 and expressed worries that it could trigger a chain effect and provoke a new round of financial crises.

The breakup is a pity, but it is simply unavoidable. Dexia received a government bailout after the 2008 financial crisis and passed a European banking sector stress test in July this year, which failed to restore market confidence in it.

Dexia holds large amounts of debt from Greece, Portugal and other troubled euro zone countries, and it likely to suffer huge losses again as the debt crisis keeps deteriorating. Financial markets seriously doubt the bank’s ability to repay its debts, which makes it unable to raise new funds to pay off its urgent debts, and leaves it no choice but to seek government intervention.

Because the capability of debt-ridden European governments to save the banks is questionable, it seems that government involvement surely cannot address the issue. Furthermore, if a wave of bank failures erupts in Europe, the European governments will not be strong enough to save them.

The current problems facing European banks mostly stemmed from the sovereign debt crisis. Therefore, the European banking industry should be stabilized by first easing the debt crisis. Europe has been slow to respond since the European debt crisis took place two years ago, and the various measures they adopted have failed to thoroughly tackle the problems and should to a considerable extent be held responsible for the deterioration of the crisis. Given the looming systematic financial risks, if Europe cannot put forward effective measures, it will suffer terrible consequences.

As the euro zone is the world’s second largest economy and the euro is the second largest international currency, the financial crisis in the euro zone will pose an enormous impact on the world in terms of the financial sector and the real economy. The trend for the European debt crisis will affect the world and will be a focus of the impending 2011 G20 Summit in Cannes.

(Liu Mingli is a researcher at the Institute of European Studies under the China Institute of Contemporary International Relations)

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