FORGET for a moment all the headlines generated by the latest statements from Angela Merkel, Jean-Claude Trichet et alabout the best way to stabilize government bond markets. Focus instead on this chart of European bank shares. Things are almost as bad as they were back in late 2008.
Now European politicians and bankers may say that these declines are unwarranted. But banking, like a fiat money system, is a matter of confidence. At one level, it is all about borrowing short and lending long, and the assumption that banks can handle the maturity mismatch. At the moment, the problem is one of capital. Many believe that the banks need to raise more capital, as their British and American counterparts did in 2008 and 2009. If you are a existing shareholder, then you assume that any new equity will come at the expense of diluting your own stake; the more the share price falls, the bigger that dilution is likely to be.
In the end, as Sir Howard Davies suggested on this morning's Today programme (the Radio 4 version, not the Matt Lauer sofa-fest), governments may have to stump up the capital. Again, given the terms governments are likely to demand, shareholders are right to be scared.