European Banks & the Sovereign Debt Crisis

The peripheral European banking system should be solvent & a plan for fiscal growth should be in place before initiating policy to facilitate the EMU – Unified Banking System

By: Vidia Ramdeen, MPA

The looming peripheral European banking and debt crisis requires two separate solutions. The national banks within the largest EMU GDP contributors, such as Ireland, Spain, Italy & France, are under capitalized with deposits & sit on a very large number of bad loans. Spain alone requires approximately €80B, which is 2x the amount recommended for recapitalization to comply with the Basal III solvency minimum. The Spanish government must recapitalize its national banks directly via the IMF/ECB firewall. My reasoning for using the firewall (at this point as I am sure the firewall is earning interest) is b/c no entity is assuming the burden of additional debt to which Spanish banks can begin to write down loans (mark-to-market) and remove these loans officially from the books.

After writing down the bad loans, the banks may begin to earn a return on deposits and investment related activity. Spanish banks cannot continue to operate as an underfunded institutions of lending & investments given the symbiotic relationship that exists between the banking system and the Spanish government given that the banks hold the government debt to which is tied to tax receipts. The underlying problem of unemployment, notably youth unemployment currently implies a reduction in the marginal return of tax receipts and growth in GDP.

Therefore, a fiscal policy based on Income-in-kind must also be in place when recapping the banks as economic velocity in the Spanish economy must increase. As €’s are given back to consumers from businesses & job/career skills training centers or educational facilities as ‘change’ (tax is withheld by the business reflected in less €’s returned to the consumer) as consumers pay for goods & services using government issued vouchers (which are taxed by returning a % of the total underlying value of the aggregate value of vouchers.) A better method of tax collection is through transaction management. Such a method would be to assign electronic cards that effectively act as vouchers to which the Spanish government can record deductions in the allotted voucher value and tie the transaction to a specific person and to the business & item or service purchased. Online purchases can be tracked this way as well.

For example: Customer A purchases Item A at Business A. The customer uses a €20 voucher for a €15 item. For simplicity the total tax borne onto the consumer from the transaction is 60%. Therefore, the change (in €’s) is €5 less 60% tax (given varied tax structures in the real world, will reduce the 60% to 50% for illustration purposes) to which the business withholds €2.50 + the sales tax on the item for the consumer. Individuals using vouchers will pay a flat tax on items and will report a yr end income based on the €’s received from using the vouchers. The business will be taxed based on the aggregate value of vouchers received against the value of goods &/or services rendered. The collation of tax receipts is much easier when performed using digitized technological platforms. Point of Service (POS) payment systems do currently exist in the market place. A selected POS would only need to be integrated to an internal government database necessary to track the taxes owed (in €’s).

By acclimating the unemployed into seeking income-in-kind as well as pecuniary returns (non-taxable, non-monetary benefits), such as training & education, the Spanish economy can reengage consumption & investment to increase current and projected GDP. The same premise and solution underlies peripheral Europe.


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