Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

If there was any justification for the protracted torture of Greece, it was the fear that an immediate debt restructuring would unleash contagion to other sovereign debtors across the eurozone and destabilize Europe’s banks, thus causing a far wider crisis. So the immediate priority for European economic policy ought to have been to use the time bought by extend-and-pretend to strengthen the resilience of the eurozone financial system and the health of the banks. If one were to follow the American example, the obvious next step was to conduct a stress test to estimate likely losses, and then to carry out an energetic recapitalization with either public or private funds. Both in 2009 and 2010 the Europeans conducted stress tests of a sort. The 2010 exercise went further than that in 2009 in naming individual banks. But it too was a farce. The results published on July 23, 2010, proclaimed that of ninety-one leading European banks, only seven would see their primary Tier 1 capital reduced to dangerous levels by a sovereign bond crisis.49 In total the Committee of European Banking Supervisors estimated that Europe’s banks needed to raise no more than 3.5 billion euros in new capital. But, as was pointed out by skeptical analysts, this optimistic result depended on assuming that the vast majority of the sovereign debt held by banks, had zero risk of default, or was fully protected by the EU’s financial stability facility.50 According to the reckoning of the OECD, on less rosy ...

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