Does anyone believe that a big part of the reason that Europe is bailing out Spain's banks is the fear of lines outside the banks? Keep in mind that the UK experienced those lines with Northern Rock not so long ago.
Oh come on! They are bailing out the banks because the banks are insolvent and illiquid and Spain can't afford to do it. The Spanish banks took almost 40% of the total of the two LTRO fundings offered by the ECB. They used the money to buy potentially worthless sovereign debt in the quid pro qou...now their real estate assets are deteriorating and their private deposits are running off; their good assets are leaving and their bad assets are getting worse. If they mark thier real estate, sovereign debt and domestic commercial loans to market they are bankrupt. They can't meet the Basell III capitalization targets that the EU has agreed to. Everyone knows the biggest Spanish Banks have to sell Latin, Asian and US assets and they are being squeezed on the price. The bottom line is that the broad base of Spanish Banks is broke and the Spainish Government cannot afford to bail them out.
yes ... but all that was true last week and last month. I'm curious about what imminent fear causes them to move. I also assume the banks will need to use some potion of this round of funding to buy Spanish debt otherwise the rate will simply skyrocket. At no point am I suggesting that the core of the problem is anything less than insolvency. Everything else, including the lack of liquidity, is a symptom.
I don't understand what is defined as "economics", but I understand economics as good as any "economist". So, I wonder what would really happen if Greece and Spain reverted back to their own currrency.
Yeah currency crises are short sharp and over fast. Well, except for this euro one. It just goes on and on and on... A neat little joke from the FT's Lex column last week, re the relationship between the countries in the euro and the European soccer championship:
Swan, the reason they are moving now is because of the Banks. Under a EMU mandate last year the EU Banks had to meet a Basll III capital threshold by the end of this month. If Greece or Spain reverts back to there old currency the new currency will be immediately reduced by an estimated 50% of value. That will reduce the value of all bank deposits. Debtors who have to pay back debt in Euro's will see the principle value of their debt double. There will be chaos in business and bank contracts...that will lead to widespread bankruptcies and increased unemployment. It won't end there...becuase Spain and Greece will default on their accumulated Euro debt obligations they will be essentially shut off from debt markets in all venues except maybe, just maybe, the IMF. They will have to match revenues with expenses...if they try to just print more of the new money the new currency will collapse...becuase it will not be backed by any external credit...soon only government will use the currency and the market will not accept it in trade...the currency will collapse inside of two years...think Zimbabwe, Weimar...they will begin using foreign currency, likely the dollar.