Megan Greene of Roubini Global Economics wrote the following this morning:
Spain's credit boom peaked in 2008 when the supply of cheap, external finance began to fall sharply. Four years later, Spanish banks' asset quality continues to plummet. The sector will require €100-250bn in recapitalisation later this year to maintain a 9 per cent core tier one capital ratio, the minimum stipulated by the European Banking Authority. In the meantime, there are concerns about the capacity and appetite of Spanish banks to support the sovereign debt, particularly amid rating downgrades and deposit withdrawals.
Let's put that in context. Call it €150bn and that's the NHS budget is going to be needed to cover Spain's banks, this year.
Or it's 15% of the value of UK pension funds (excluding insurance funds).
Now that's not going to happen is it? The market's not going to throw that good money after bad. So it's the Trokia that will be back in action. And that's where Greece is now.
Is Spain going down the same road?
If so this is going to be a road well travelled - but at massive cost.
Germany had better start reconciling itself to bail outs for all our sakes is all I can say.
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That loan loss provisions are only just being discovered in Spanish banks despite the crash in real estate prices occurring a number of years ago speaks volumes about the uniform application of accounting standards and the accountants in auditing such standards.
I just wonder how long it will take for the Germans to realise that you cannot have a fixed currency regime without devloping a proper regional policy within that regime – but given yesterday’s thumping for Merkel’s party perhaps there is now some hope in that direction. Re those economies struggling within the Euro – surely there must come a stage when the reduction in real incomes that has already occurred becomes sufficient even for the markets to realise that little further correction is required – but I suppose the problem is that those driving the markets are too ideological and driven by the prospect of some short term speculation to realise the damage they are doing.
Actually, Germany had better start reconciling itself to the breakup of the single currency, return to national currencies, massive appreciation of its national currency and loss of its export surplus. There is no way Germany can bail out Spain. It’s far too big.
Oh, it can bail out Spain
It’s just a choice of how the inflation occurs
Ah, you don’t mean Germany directly. You mean the ECB creating money. Necessary for Spanish banks, I agree, and will almost certainly happen one way or another whatever the treaty says. But the sovereign probably also needs bailout, and that is a much thornier problem. Germany cannot bail out a sovereign the size of Spain – and if by some means it manages to do so, that bailout will almost certainly be followed by bailout of Portugal, Italy and maybe France as well. The German people know this. It is politically unacceptable.
I can recall conversations with people when I was quite small who were themselves quite small just before Germany became one nation. Anyone taking bets?
It’s funny, BTW, that Roubini and Greene wrote the same the same things last Thursday for th FT:
http://on.ft.com/JxneWX
No – it’s just this extract is from her blog version
In Spain, it is not the profit hungry listed banks that have the real bad loans, but the regional savings banks who lacked the risk management and continue to lend into the coastal areas as the boom ended. Just like Germany, it is not a good advert for small community banks.
I doubt Germany will bail-out Spain. It would mean loans of over 50% of GDP.
The government, and any succeeding government, would fail….
It looks like bad is going to get worse.
http://imageshack.us/photo/my-images/690/efsf3.jpg/
I’m afraid this is just getting silly – the argument for countries being forced out of the Euro is that they could restore their international competitiveness and cut their debt burdens by devaluation and inflation rather than cust in real wages which is the only mechanism under fixed exchange rates. Given that the latter has largely happened in the countries concerned, it seems likely lunacy to inflict a further source of medicine through devaluation rather than giving the first one time to take effect. It should be remembered that currency devaluations typically take c18months before the benefits are felt – and can be pretty unpleasnt in the mean time. Of course that may not be true for short term speculators looking for a quck buck.
Do you REALLY think that Greece has no further to fall, that the current measures have been sufficient to bring its cost of production down to where it needs to be in order to restore competitiveness? If so, you are deluded. The expansion it experienced during its Euro membership was entirely funded by foreign capital inflows and was mostly used to buy imports (including arms) and create public sector sinecures for government cronies. The Greek economy is no more productive than it was in 2001. It just has far more debt and a population that has come to expect a higher standard of living. Since there is no political will whatsoever to provide the fiscal transfers that would allow it to maintain that standard of living in the absence of the productivity to support it, it is inevitably going to decline back to where it was before it joined the Euro – which from the figures I’ve seen looks like about a 50% devaluation from where it is at present. If it leaves the Euro it will experience that devaluation suddenly and painfully. If it stays, it will experience the same devaluation slowly and painfully.
They can also cut their debt burden by just defaulting on debt payments.
Which is what Greece will probably do after they leave the euro….then a new ball game starts….and nasty gets nastier.
They may not default – they’ll just offer drachmas….saying the debt is now in their national currency
Richard, the new bonds are under UK law. Revaluing them into drachma would be the same as default.
So?
That’s going to happen
The alternative may happen though: Germany may leave the Euro.
They may not even adopt the [new] drachma, they could decide to adopt the US$…and many contracts state the currency dealt in…a default is virtually certain….and from there it is downhill all the way.
What is the exposure of other countries/banks ?
As much as several trillion euros’, and counting ?
I think you mean ‘Greece may leave the euro’, but Germany leaving may be a better option.
No. I meant Germany leaving !
Then the rest of the Eu can be a low-cost production area and holiday place for Germany !
The other option would be for Germans to become spendthrifts, rather than forcing austerity on everyone else. In the current environment i very much doubt that there historic fear of inflation has much validity.