The eurozone faces a triple problem: stretched states, fragile banks and shrinking economies. If addressed properly, we can make a virtuous cycle that will help with all three. If managed poorly, however, they could descend into a vicious cycle.

Governments and banks are now linked. States that had to recapitalise impaired domestic banks have taken on extra debt. Conversely, sound banks have been affected by the weakness of their home governments. The effect has been to lower the credit ratings of both banks and sovereigns. Combined with the need to deleverage and the freezing of money markets, there is now less international lending through financial markets and the flow of credit is hampered.

This weighs heavily on the real economy of the eurozone where in particular small and medium-sized enterprises depend on access to bank loans.