Has the Eurozone Already Fragmented?

The invaluable Gillian Tett raises an interesting question. Despite the enormous concern about the possible breakup of the euro, divorce proceedings may already be under way in the dark recesses of bank portfolios. Risk managers, preparing for an eventual collapse, have realigned their portfolios, Tett reports, so that assets are matched to liabilities. In other words, if a French bank has lent money to entities in Spain, the bank will have attempted to secure Spanish financing for those loan assets. Previously, this was not the case. A French bank might lend to Spain against short-term financing from Germany, say, or the United States. This promoted a free flow of capital and made financing of loans to the periphery cheaper and more plentiful, but also vulnerable to sudden stops and, in the event of a breakup and reversion to national currencies, currency risks. Under the new "asset-liability management," or ALM, procedures, this is no longer the case. In short, one of the benefits--a problematic benefit, as we have seen--of the euro, namely, cheaper capital for the periphery, has already been lost, a casualty of past irresponsible lending and intoxication with what, in principle, should have been a good thing.