Europe needs €2 trillion bail out, says Buiter

24 June 2010 12:44 pm | By Lee Jones

Buiter, who is now chief economist at Citigroup, says the €860bn (£708bn) ‘shock and awe’ bailout from the European Central Bank and the International Monetary Fund is not enough to solve the sovereign debt crisis.

Buiter says: “Although the Facility could fund all of the roll-over and anticipated future deficit financing requirements of Greece, Spain, Ireland and Portugal for the next three years, it would last less than two years if Italy were to join the club of borrowers.

“A facility of, say, at least €2 trillion would meet the sovereign funding needs of any conceivable combination of Euro Area member states for almost three years. This would allow intervention with the threatened firing of the big bazooka favoured by former US Treasury Secretary Hank Paulson.”

Buiter argues that the European private sector, as well as the public sector, is in need of the EU IMF bailout fund. He says unlike UK and US banks European banks have not been properly stress-tested and may need further assistance.

Buiter says: “Reports suggest that EA banks have significant exposure to the sovereign debt of the Peripherals and even greater exposure to their private sectors, which are unlikely to prosper if the sovereign were to be severely challenged in the markets for its debt.

“Euro Area banks therefore need additional capital – a lot of it. This may not be apparent from their ratios of regulatory capital to risk-weighted assets but, in our view, both the numerator and the denominator of this ratio are deeply unreliable.”

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