12 SEP 2010
By Hao Li | International Business Times
The European Union's (EU) sovereign debt crisis and banking crisis that began in the summer of 2010 has not been resolved yet, said Joachim Fels, Morgan Stanley's chief fixed income strategist.
EU government bodies remain the only buyers of Greek debt. Irish and Portuguese debt are not doing all that well either. Many EU banks cannot stand on their own and rely on loans from the European Central Bank (ECB).
These two problems are interconnected because governments are essentially liable for losses of banks via bailout obligations while banks are exposed to losses on sovereign debt because they hold them on their balance sheets.
In addition, banks that lack capital shrink their balance sheets, which takes away credit from the private sector. Banks then miss out on lending profits and economic growth in the private sector is hampered, which leads to lower tax revenues and exacerbates sovereign debt problems.
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