PARIS - Which Christine Lagarde is to be believed?
The Lagarde at French Finance Ministry headquarters less than three months ago who was putting up a reassuring face about the health of European banks; or the Lagarde who, as head of the International Monetary Fund, was declaring this past weekend that immediate measures were needed to recapitalize those same banks, by force if necessary.
One thing is for sure: the new IMF chiefs alarmist speech only adds fuel to the fire of the financial crisis. The fact that this woman, who was one of the strongest supporters of the bank stress tests when she was still in France, has now clearly sided with the Euroskeptics, can only undermine the already shaky trust in the stability of the banking sector.
Indeed, her words give the feeling that Christine Lagarde is now finally at liberty to talk freely. Now that she is in Washington, she might finally tell the truth and lead the way towards a financial and economic recovery.
This feeling, however, is both wrong and misleading. Wrong, because in substance, the recapitalization of the banks has already started. European banks have raised 60 billion euros between January and June 2011. Whether they did it with their own means or via public support, it is happening right now. The recent announcement of two major Greek banks merging proves it.
Admittedly, the attempt is not very well spread out among the different actors, and is undoubtedly too slow. Still, everyone is now convinced that the basic share of stockholder equity must be increased. And not only in Europe.
And it is also misleading because Christine Lagardes words -- and the words of all those who campaign for a forced recapitalization of the banks -- can lead some to believe that this piling up of stockholder equity is the singular solution to the crisis, a kind of barrier against which speculators attacks will finally be broken.
This is of course a fantasy. When the markets begin to wonder whether France would be able to pay off its debt, we suspect that the banks may never have enough shares to absorb a major run on government bonds. Today the urgency is to find a political solution to the sovereign debt crisis. This can be handled by better governance on both sides of the Atlantic, which must include an end to inopportune declarations.
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Photo - Roebot