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European banks “in far greater danger than people realize”

The Eurozone economic crisis has been relatively quiet for some time, taking a back seat to other world events. But, in an interview in Der Spiegel, US economist Barry Eichengreen reminds us that all is still not well:

The present bailout attempts have never made sense. Essentially, all Germany and France want to achieve with these measures is to protect their own banks from collapsing. Now people are beginning to realized that there is no way around rescheduling Greece's debt - and that will also involve the banks...

Europe's banks are in far greater danger than people realize. Most people now understand that last year's stress tests didn't tell us much. The tests were a token gesture and lacked realistic scenarios. They completely ignored the liquidity risks that banks could face.

Eichengreen also warns about how the bond market might turn on the US economy:

I worry that [bond traders] will begin to distrust the US soon too. History has shown us that financial crises always happen close to elections. We have an important election coming up in 2012. If we haven't tackled our debt problem by then - and it looks unlikely that we will - then we will face serious problems.

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