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Tarun Jotwani, head of global markets at Nomura in London, is in no doubt that Europe’s sovereign debt markets have now reached a critical point. Euromoney meets Jotwani at the Japanese bank’s sparkling new London offices on July 12 as Italy’s 10-year bond yields recover from a dangerous excursion above 6%. A sense of crisis is in the air. “We are at a crossroads,” Jotwani says. “The sheer weight of BTPs [Italian government bonds] outstanding means that the game has changed.”
Socialization of losses
Questioning how the asset managers and banks that hold the €1.5 trillion of outstanding BTPs will react to recent events, Jotwani states: “We need some kind of US-style ‘shock and awe’ development. There needs to be some kind of socialization of losses in Europe that Germany is unwilling to underwrite.”
His proposal for such a scheme is to use Europe’s bailout fund, the European Financial Stability Facility (EFSF), not to provide liquidity but to recapitalize the banks. A European banking sector on a stronger footing would then be able to sustain losses from the Greek restructuring that must surely come.
Give Greece relief
“The practical thing to do is to use this opportunity to allow Greece to undergo a pre-packaged restructuring and give it some relief,” he tells Euromoney. “But this means that the banks will suffer losses. So the time has come for EFSF funds to be used as contingent capital for the banks of Europe.
“The financial sector is at the root of the problem and therefore money should be used for capital rather than liquidity,” he explains. “Recapitalizing the banks is the logical thing to do as it will put them in a position to be able to take the losses that would come from a restructuring.”
Describing Europe’s core problem as stemming from a lack of growth together with a culture of entitlement, Jotwani urges resolve among decision-makers in order to prevent a further loss of confidence among investors. “The concept of underwriting the banks of Europe is a big psychological step change. The politicians would have to be brave to do this.”
