Eurozone Bank Recapitalisations: Pouring water into a leaky bucket

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Paul De Grauwe
24 October 2011

Unlike the banking crisis of 2008; when governments had significantly lower debt burdens, governments today cannot recapitalize banks without triggering downgrades and renewed fears of sovereign default. In order to stop this downward spiral in the eurozone, a credible floor has to be put in place on the prices of government bonds. This CEPS Commentary argues that the European Central Bank is the only institution capable of imposing such a floor and breaking this vicious circle.
Paul De Grauwe is Professor of Economics at the University of Leuven and Senior Associate Research Fellow at CEPS.