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FXstreet.com (London) - Richard Koo is chief economist at Nomura Research Institute and he said, “Separation of banks and sovereign risk would be counterproductive”.

Key Quotes:

“…the EU’s ongoing effort to separate sovereign risk and the banks would not only cripple the automatic recovery mechanism that balance sheet recession countries have but—unless accompanied by a framework for the joint issuance of eurobonds to ensure that savings are returned to their countries of origin—could also increase aggregate unborrowed savings (i.e., the deflationary gap) in the eurozone”.

“The rise in periphery government bond yields that triggered the euro crisis occurred because the unborrowed savings of countries in balance sheet recessions fled to other eurozone bond markets. If so, the EU authorities should introduce new risk weightings to directly address the issue and avoid the policy of separating banking and sovereign risk, which could exacerbate existing problems”.
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