Tags: Davies | eurozone | deep | trouble

Ex-Bank of England Official: Eurozone Still in Deep Trouble

Sunday, 05 May 2013 03:32 PM

By Dan Weil

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Financial markets have barely reacted to recent signs of continued trouble on the debt front in Europe, but problems are still brewing beneath the surface, says Howard Davies, former deputy governor of the Bank of England.

So why haven’t financial markets tumbled?

"One answer is that we remain in the year of [European Central Bank President Mario]
Draghi," Davies writes in the Financial Times.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

"His assurance that the euro would be preserved come what may is still seen as a credible
underpinning to the sovereign debt markets, even though the economic situation has deteriorated further since he spoke, debt reduction targets have been missed and the banking union heseeks . . . is still far from a reality."

The eurozone's problems certainly haven't gone away, Davies says.

The spread of corporate bond yields in Spain and Italy over those in Germany haven't shrunk, he writes.

"Banks in those countries are struggling for capital, and credit is constrained. We can no longer pretend that there is a single financial market in Europe. . . . The situation is not stable."

Roberto Perotti, an economist at Bocconi University in Milan, says the ECB doesn't have the
ability to hold things together in Europe that many now seem to assume.

"The markets are overestimating the capacity of the European Central Bank to intervene in case of need," he told The Wall Street Journal.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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