European banks on brink of failure as fear takes hold

Several of Europe's banks are on the brink of failure, as national governments race to do what little they can to prevent another global financial meltdown.

LONDON, ENGLAND (Catholic Online) - If just one European bank fails, it could have a domino effect on the Continent's other banks and the world economy as a whole. European governments are preparing to bailout their banks, but political infighting and soaring debt is diminishing the chances of such an effort to succeed. 

Private investors are shying away from European banks. European firms have often been able to appeal to the private sector, even U.S. banks, for the capital they need to operate, but investors are cutting back rather than increasing their shares in European holdings. As a result, banks across Europe are facing a difficult choice.

They can issue shares at low interest, which will diminish the value of existing shares while raising only a moderate amount of capital, or they can appeal to the government. All have chosen the latter, but government bailouts are not guaranteed.

While the 17 countries of the Euro Zone have agreed to bail out countries like Greece, and possibly their banks, individual governments have been engaging in debates on whether or not they wish to proceed, or if it is even legal for them to do so.

Germany is debating the legal question, and Finland is expected to outline conditions to their contribution that will ensure they will be repaid. Other countries are also expected to impose conditions on their contributions.

It's the reduced level of investment and the uncertainty of politics that is turning the possibility of a bank failure into a probability. As the markets fear failure, they engage in the precise behavior that makes failure inevitable.

It's a financial version of the prisoner's dilemma, were no investor wants to hold their shares only to see the banks fail. And as investors and depositors cash out their holdings, the banks become less able to prevent failure. 

In order to save the European banks, the countries of the Euro Zone must work together and coolly bail them out, regardless of cost because the cost of not doing so will surely be greater than the cost of letting them fail. However, fear appears to be driving both markets and governments away from the solution, and into disaster. 

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