Asta Pravilonytė Every manager can call him or herself a good strategist if he or she only works within an environment that is favourable; however, it is only in times of stress that one truly learns what one's capabilities are!

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Wednesday, 27 June 2012

Lack of capital or capabilities?

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After the massive warnings from credit rating agencies about the deteriorating creditworthiness of financial institutions and new suggestions for better capitalization and additional injections of liquidity to sustain stability, an open question remains whether additional capital can restore self-sustainability of financial sector. Moreover, during the past several years financial system became more vulnerable and less significant for recovery of economy.Further shortages of funds simply remind that currently held capital is not enough to fulfil all desires.

Spain's credit rating was downgraded by Fitch from A to BBB in 7 June and 28 Spanish banks’ credit ratings were downgraded by Moody in 25 June. The yield on 10 year Spanish government bonds increasedabove 6.5% and independent auditors revealed that Spain’s banks need 62bn euro support. Worsen situation caused Spain to ask officially support on Monday. The next country which possibly will need bailout is Cyprus. Fitch downgraded the country's credit rating to BB+ from BBB-and it could potentially require 4bn euro to recapitalize its banks, heavily exposed to the Greek economy.

As a response to the prevailing negative outlook, a proposal Towards a Genuine Economic and Monetary Union was introduced by President of the European Council, Herman Van Rompuy on Tuesday, 26 June. The plans for further banking, fiscal, and economic union could meet a tough opposition at EU summit on Thursday and Friday, 28-29 June. Angela Merkel refused to accept common liability and to introduce eurobonds.

So, could political union be sustained by sharing and implementing the best practices those strengthen banking system, enhance fiscal discipline and develop economic potential? Moreover, will EU’s leaders stick to the additional capital needs and common debt of euro zone countries - eurobonds; or will the debate turn towards measures those enhance capabilities to contract in at least painful way and enforce recovery with a new strength.