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Weak EU banks may push world into 2nd financial crisis

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Weak banks in the European Union could add pressure to that region’s sovereign debt woes and lead the world into a second financial crisis, a researcher at a Chinese think tank said in an opinion piece Tuesday.

“Is the sovereign debt crisis dragging down banks, or is the banking crisis worsening the sovereign debt crisis? What is certain is that risk contagion is unavoidable, and these risks could very well spread to the global financial system. That situation would be no better than what the world faced in 2008,” Zhang Monan, a researcher at the State Information Center, wrote in the Securities Times.

The center is part of the National Development and Reform Commission, China’s economic planner.

Zhang’s comments come ahead of a visit to Beijing by French President Nicolas Sarkozy on Thursday to discuss the global economic situation amid intensifying investor worries over the euro-zone debt crisis.

As more euro-zone countries seek collateral in exchange for their loans to Greece, the cost of the Greek bailout is set to rise for governments across the currency bloc, Zhang said. That trend would likely dry up liquidity in the region’s banking system, raising the risk that the rescue of Greece will have to be aborted, she said.

“Judging from the current situation, governments will neither be able to take over banks’ bad debt, nor will the banking system be able to finance the bulk of sovereign debts as they did at the start of the global financial crisis,” Zhang said.

This vicious cycle is bringing the world another step closer to a new global financial crisis, she said.

In a separate opinion piece also published Tuesday in the state-run Shanghai Securities News, Zhang argued that a tax on global financial transactions is necessary and “inevitable.”

Profit-seeking cross-border capital has pushed up prices and currencies in emerging economies, destabilizing government efforts to tame inflation and prevent asset bubbles. A financial transactions tax, sometimes known as a Tobin Tax, may be a way to reduce volatility in the market, Zhang said.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said last week that their respective finance ministers will propose a tax on financial transactions in September.

Shanghai, August 23, 2011 (Dow Jones)