No deal on bank debt until Spain is resolved: Faber

There will have to be a deal on Spanish bank debt before a decision will be made on Irish bank debt, according to the chairman of the German Exchange, Joachim Faber.

But there could be challenges in securing a deal. “The plan is for Ireland to get its budget deficit down from 8.5% of GDP to 3% of GDP.

“If it can do this while still financing the costs of the debt, then the view in Europe could be that the debt is manageable,” said Dr Faber.

But the risks to the economy are too great at these debt levels, particularly if there is no growth. “I have a sense that what was said at the June 29 summit is weak and might be different to the opinion that is there now.”

There were risks that if Irish bank legacy debt was transferred to a European vehicle then other countries would demand the same treatment, he said. But Ireland does not have a functioning banking system, so there may have to be a some sort of a transfer of debt to Europe.

“We will have to wait to see what happens in Spain.”

Dr Faber, who was addressing the Institute of Directors last night, said that the banking sector in the US and Europe had not worked with governments in developing an appropriate financial regulatory framework.

The danger now was that governments would act unilaterally, which would harm financial services in the future.

“But we need banks because we need growth.”

The danger across Europe is that countries would adopt nationalist policies when a pan-European solution was needed for the crisis. The German economy had benefited from the euro, he said.

Moreover, he acknowledged that eurozone imbalances had created a bubble in Ireland.

If the EU’s largest economy was not in the eurozone, then the deutschmark would be roughly 20% higher than the current euro rate and interest rates would be 2%-2.5% higher. “This would undermine competitiveness and the German export model.”

German industry was now taking an active voice in shaping German opinion about the euro and urging Germans to accept more federalist policies necessary to keep the euro together.

He said “Frau Merkel” had done an excellent job in bringing public opinion along. But most mainstream German parties are pro-euro. He does notexpect populist anti-EU and anti-bailout sentiment to form part of the pre-election debate next year.