As the FT notes:
Europe’s debt crisis escalated on Monday as Italy and Spain saw their borrowing costs soar by record amounts, hitting bank shares and stock markets globally.
As Duncan Wheldon put it yesterday, contagion has now happened. There's no point worrying about it any more. It's reality.
And the reaction of the banks is typical, as noted in the same FT article:
“It is essential that euro area member states and the [International Monetary Fund] act in the coming days to avoid market developments spinning out of control and risk contagion accelerating,” said a six-page paper presented to eurozone finance ministers by the banks on Monday.
So we're back to where we always get: banks took risks but don't believe in caveat emptor: they think the risk always lies with government.
Now I happen to argue in my forthcoming book, the Courageous State, that the state is the guarantor of last resort. Of course it is. But that comes at a price. The price is real corporate responsibility within a firm regulatory framework. This requires:
1. Much tighter regulation of companies so that all of them, without exception, fulfil the obligations imposed upon them by law;
2. Much tighter imposition of penalties on companies when they are due;
3. Stricter capital requirements for all companies, whether large or small, to ensure that there is a genuine buffer provided so that the company can finance its own activities without relying upon recourse to creditors (unless loan financiers) and especially the state;
4. The absolute spitting of banks between those that undertake retail provision and that underpinned the money supply and those that undertake riskier investment activity;
5. Vastly improved corporate reporting requirements from large companies right through to small ones, including country by country reporting and a complete explanation of all the risks held on or off balance sheet by companies whether in tax havens, or not;
6. Increased capital requirements for banks, over, above and beyond those currently in place.
7. Significant new restrictions on financial trading, the velocity of trading, the activity of hedge funds is, the use of derivative finance and automated risk trading so that the capacity of the market to generate liquidity when times are good, but to deny it all together when risk arises can be limited.
8. Granting the right to the state to suspend disorderly markets.
I do not suggest that this would tackle all the risk that has arisen to date because of course we have a legacy of problems from past debt issues, past misinformation, past mis-trading and the inherent risk that the euro created, which was itself not appreciated by those economists who drove it forward. As a result I do not deny that there are reasons why, almost inevitably, banks will have to be bailed out yet again at the present point of time. My point is not that they won't be, because that is inevitable: by point is that this time we must attach serious conditions to the bailout bank rebates obligations that will create sustainable markets in the future. Only courageous states can do that.