DAVOS SUMMIT:BARCLAYS CHIEF Bob Diamond believes that the disruption in the euro zone will not lead to the break-up of the single currency, but warned of further "chronic" volatility.
Citing discussions with 45 bank leaders on the sidelines of the World Economic Forum, Mr Diamond told a panel discussion in Davos that the “acute” phase of Europe’s sovereign debt crisis now appeared at an end.
Ahead of a key summit on Friday at which EU leaders will discuss new measures to intensify their campaign to shore up the currency, French finance minister Christine Lagarde said “the euro has turned the corner” at the same session. “Let’s not short Europe and let’s not short the euro zone.”
Amid expectation of a deal next month to expand the euro zone bailout fund, Ms Largarde’s German counterpart Wolfgang Schäuble said Europe was prepared to draw the consequences of the crisis and “create instruments” to defend the whole euro area.
“I don’t expect that there will be further major shocks,” Mr Schäuble said. “I think the euro will be stable.”
The tone of the ministers’ remarks underscored mounting confidence that EU leaders will agree a comprehensive package to widen the scope and scale of the European Financial Stability Facility.
Mr Diamond drew a curt response from Ms Lagarde when he said banks were grateful to central banks, finance ministers and regulators during the crisis. She said she wanted to see rebalanced compensation systems in banks and reinforcement of their capital.
Despite saying the currency was no longer under existential threat, Mr Diamond said bond markets would remain under pressure due to concerns about weak public finances and high indebtedness.
“I don’t think volatility in the markets has gone. But what was an acute issue a year ago is at worst a chronic issue today,” he said. “The question of whether the euro is going to stay together is last year’s issue.
“We’re still going to see some volatility, but the big question of whether the euro is going to survive is off the table.”
When approached by The Irish Timesafter the discussion, Mr Diamond declined to offer any view on the question of senior bondholders in Irish banks being compelled to take "haircuts" on investments.
Such steps were ruled out from Ireland’s EU-IMF rescue deal, but leading academic economists Nouriel Roubini and Ken Rogoff argued in Davos that moves in that direction would improve Ireland’s position. In private, senior bankers say unilateral moves to do that could trigger market contagion and a drastic loss of confidence in Ireland.
Neither Ms Lagarde nor Mr Schäuble responded to questions about the possibility of debt restructuring in the euro zone, something EU leaders have agreed to facilitate after 2013 but not before it.
However, provisions to allow embattled euro countries to buy back their own debt at a discount are on the table as leaders seek to widen the facility’s mandate.
Ms Lagarde said France and Germany have “learned from our mistake” in 2005, when they successfully campaigned to water down the budget rules enshrined in the stability and growth pact.
