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Spanish banks have 7% equity capital on average on their balance sheets. Thus, a debt-equity swap of less than 7.5% of the creditors' investment would be enough to compensate for the banks' losses. And, even if the banks private depositors, whose claims are 39% of the aggregate balance sheet, were excluded, the debt-equity swap necessary to compensate for a loss of up to 100% of the equity would be less than 12% of the creditors' investment volume. Debt-equity swaps have been used successfully in many cases, and actually follow from normal bankruptcy procedures. Apart from avoiding the excess burden and injustice of taxation, they also have the benefit of inducing banks' owners to choose a prudent investment strategy, while persuading creditors to scrutinize and select carefully the banks to which they want to lend. The care taken in augmenting and preserving the wealth that current generations inherited from their ancestors is the ultimate reason for economic growth and capitalisms success. Massive government interventions during the crisis have undermined this principle, and have probably already destroyed much of the inherited wealth. It is time to heed the fundamental laws of economics and put a stop to the imprudence that those charged with fighting the crisis have been allowed to get away with. Europe needs no banking union beyond a common regulatory system.
Hans-Werner Sinn Professor of Economics and Public Finance, University of Munich President of the Ifo Institute * Published under the title Den Steuerzahler schonen, Handelsblatt, No. 114, 15./16./17. June 2012, p. 67, and under the title The European Banking Union?, by Project Syndicate.
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