Tuesday, July 10, 2012

The Spanish Bank Bailout

Eurozone finance ministers reached agreement early Tuesday on the blueprint for Spain’s €100 billion bank bailout plan, a deal expected to see the first €30bn in aid from the eurozone’s €440bn rescue fund sent to Madrid by the end of the month.”

This statement appeared in the Financial Times.

However, near the end of the article, we read:

“It remained unclear whether the issue had been completely decided. Eurozone finance ministry officials gave conflicting and sometimes contradictory accounts of how the new ESM recapitalization plan would work after the meeting, and in an agreed statement, ministers said discussions on such details would only begin in September.”

Once again we hear, “We’ve done it!” followed by, “The details still remain to be worked out!”

Major issues are still being debated. 

“Germany’s finance minister said that even once the eurozone’s bailout fund has been authorized to directly recapitalize struggling banks, the lenders’ host government should retain financial liability for any losses.”

Germany is not going to be a part of a bailout plan that exempt’s those countries from the responsibility of recognizing and accepting their insolvencies.  To do so would result in Germany “writing a check” for those insolvencies…and this is not “on the table.” 

I treated this in by blogpost from yesterday, "Financial Markets Keep Pressure on Spain and Italy."  Today, the yield on the 10-year Spanish bond is around 7.00 percent and the yield on the 10-year Italian bond is just above 6.00 percent.  These yields are said to be “unsustainable” in the sense that these governments cannot fiscally afford to pay such high interest rates.

Wolfgang Schäuble, Germany’s finance minister, stated “’We expect that the final liability of the state will remain’ even once the banking supervisor is up and running.”

Then there is the question about whether or not the weakest banks in Spain will be included in the bailout plan.  If only the biggest and strongest are included in the new banking union, it will mean that the weakest banks, requiring the most financial help, will still be the responsibility of the sovereign nation. 

 It still appears as if Germany will not let the peripheral eurozone countries “off the hook.” And, in my opinion, why should the Germans put up the funds?

The problems in Europe are, and, always have been, an issue of solvency.  European officials have never really accepted that fact, always placing the blame elsewhere.  It was not a solvency issue, it was a liquidity problem.  It was not a solvency issue, it was the fault of greedy international speculators.  And, so on, and so forth.

Until European officials accept this fact and also accept the fact that “real” restructuring needs to take place within their societies, nothing is going to change. 

I can’t believe that one of the major moves the new President of France, François Hollande, made was to lower the age of state pensions from 62 years to 60 years, reversing what his predecessor had done.

I know that this move was basically symbolic, but it does highlight the mindset of many Europeans.  “We like the benefits our governments have given us, whether or not they make our life worse off than they would be otherwise.”

It is hard to see the elected officials of the impacted states in Europe accepting their responsibilities concerning the solvency issues and taking real steps to restructure how their societies work.

If Germany writes a check without any real concessions on the part of these troubled nations, nothing really is changed.  The European continent will continue to lag in productivity and growth.  Its young people will still face an unemployment rate of around 50 percent.  And, discontent and unrest will become even more common.

One keeps hoping that something will be done.  As for me, I am trying to avoid investments in industries or companies that have a major connection with Europe.  Europe, on its present path, is not the future. 

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