Spanish Bank Rescue: Will the Treatment Make the Patient Worse?

Spain has reversed itself and asked the Eurozone for “up to” €100 billion after not long ago insisting it could go it alone. The proximate cost was the increase in its sovereign debt yields in the wake of the announcement of a bailout of Bankia, which was cobbled together from dud cajas. Even though Spain’s bond auction last week got off better than expected, that was likely in part due to the expectation that the creditor states would indeed ride in to the rescue.

But will the latest, yet to be finalized remedy do anything more than buy a little time? The half life of Euro-interventions is shortening. George Soros has argued that the Europeans have at most three months, and the action they need to take must be decisive. Unfortunately the Germans are signaling movement, but the ideas they are touting, such as having debtor nations agree to cede more sovereignity and implementing pan-European banking supervision, aren’t like to be achieved quickly; indeed, they may require treaty approvals.

And there are reasons to wonder whether the Spanish bank rescue will accomplish its aim of bringing Spanish bond yields back to a more sustainable level. The first question is whether it is big enough. Even though the Spanish government is confident that €100 billion gives it an ample buffer, Spain’s unemployment level only recently gapped up to 25%. Without a fix for the underlying economy, it’s not hard for the powers that be to underestimate the stresses Spanish banks will face as the impact of job losses work their way through the economy.

Second is the bank rescue is being routed through Spain’s Fund for Orderly Bank Restructuring and repayment will be an obligation of the government, bringing its total debt outstanding from roughly €600 billion to as much as €700 billion. There is a good possibility that this change alone will lead ratings agencies to downgrade Spain from singe A to BBB.

Third is that the specific funding mechanism has yet to be decided. Even though the Spanish finance minister asserted the loan would be “on very favourable conditions, more favourable than in the market,” that remains to be seen. The funds will come from the EFSF and the ESM. The problem with that is that use of either one has adverse implications. Spain may have to get at least some funds from the EFSF, since the ESM is not operational for another month. But Finland insists that if Spain gets funds from the EFSF, it must provide collateral, and it is not likely that Spain has a ton of good collateral sitting around. To the extent the funds come from the ESM, those obligations will be senior to that of existing and new sovereign bond issuance. Needless to say, this change is not going to be a plus for Spain as far as its regular bond issuance is concerned.

Various commentators have argued that the Eurozone needs to backstop its banking system, say by issuing deposit guarantees. Instead, just as the Troika did with Ireland, the Eurocrats are intent on making a bust banking system the problem of its already-stressed government, even when the markets are certain to see around the circularity of that arrangement. We argued that the Irish had the upper hand and could have stared down the Troika (Irish bank failures would have blown back to certain German banks), but Irish were sold out by the head of their central bank. Spain was widely acknowledged as having considerable leverage in its negotiations with the officialdom; it is clearly too big to fail. So it is puzzling that it allowed itself to be put in the same position as the Irish. It seems the Spanish were so pleased not to be required to implement more draconian austerity measures that they settled for less than they could have.

As Marshall Auerback discussed by e-mail, this measure also fails to address the existential threat to the Eurozone:

There is a key flaw in the European monetary system that lies behind the current bank run, an all important difference between the Target 2 clearing system and that of the Federal Reserve. As Peter Garber explained in 1998, any possibility of a euro exit by one of the euro member countries creates a risk of a currency loss to parties involved in the euro area banking system. There is no parallel potential currency loss in the case of the US. No state is going to pick up and run and form its own new currency (Rick Perry’s mindless secessionist threats to the contrary in Texas). It is this potential for euro exit and subsequent currency loss that fuels the European bank run. It is this potential for currency loss that prevents the private interbank system from recycling flight deposit funds from recipient nation banks back to the banks in those countries where the deposit run originates. This is why the ECB has to step in and act as lender of last resort lynchpin in the system. There is no parallel need for such a Federal Reserve role in the U.S.

Peter Garber explained that, given the complete capital mobility in the EU and euro wide acceptance of a common currency, transferring deposits from a domestic commercial bank in one nation to a bank domiciled in another EU nation is costless. In a world of rational economic agents, any non-negligible perceived probability of euro exit and subsequent currency loss should result in a massive deposit run. The imbalances we see now reflect only the early stage of such rational behavior. The bank deposit run and therefore Germany’s unenforceable claims against the periphery countries could explode.

So, given these considerations, the ECB’s “unenforceable claims against the periphery” could be many trillions of euros by year end to which Germany would be massively exposed. Therefore, according to Soros’ logic, Germany would be all the more trapped into doing whatever is necessary to preserve the euro.

The endless stopgap measures have kept the Eurozone limping through its sovereign debt/banking crisis far longer than I thought possible. But the seeming success of bare minimum moves may well have conditioned the authorities to continue on that path. If so, it will prove to be their undoing.

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  1. Min

    “Second is the bank rescue is being routed through Spain’s Fund for Orderly Bank Restructuring and repayment will be an obligation of the government”

    Right. And the responsibility for bailing out Wall Street rightly fell on New York State. Helluva way to run a railroad!

  2. psychohistorian

    So the details I have heard is that it is 125 billion of something and the Irish are already arguing for going back and opening up their negotiations again.

    Sweeeeeeet! This can has a certain sound to it already.

    It is like asking for better trolls or for Krugman to talk about private money and public money or the military in relation to trade.

    So what event “shatters” the confidence of the “reported public” this year ???

    boooooggggaaa wooooooggggaaaa !!!

    I want to know when the end comes if the sewage treatment plant operators keep their jobs? Does shit still roll down hill? How much does it cost?

    Where is my popcorn? The EU show of serious puppets is building energy.

    When is the next meeting? The public for show one, I meant?

    1. psychohistorian

      I want to propose that all disaffected citizens of the world follow the lead of the nascent movement in Canada that follows what the Argentinean’s started….the banging of pots and pans for a certain period each day.

      The video I saw of the Canadian’s protesters has them asking for a public discussion of government social and economic policy. Seems like a reasonable request to me and I think the greater public needs to understand our situation better before we rush to implement another dressing to our fetid social disease of class.

      1. Warren Celli

        psychohistorian said; “Seems like a reasonable request to me and I think the greater public needs to understand our situation better before we rush to implement another dressing to our fetid social disease of class.”

        I like that you refer to it as a social disease of class. It is called Xtrevilism.

        Deception is the strongest political force on the planet.

  3. wunsacon

    >> George Soros has argued that the Europeans have at most three months.

    Seems to my amateur eye that the “triangle” on gold/silver charts should resolve around then. This fall should be very interesting.

  4. F Libertarians!

    A couple thoughts:

    1) Since it’s obvious from the ability of both presidential candidate’s recent relative success in terms of raising campaign money that Romney is going to win the 2012 Presidential Elections in a landslide, maybe Obama can do us all a favor for once and postpone the next global financial meltdown for the beginning of Romney’s first term as president. Maybe that will politcally cripple Romney sufficiently such that it will be impossible for him and his Republican economic and fiscal co-assassins to pass something similar to the Ryan budget. (Ok, I’m being dumb here. Romney wins -> the economy collapses -> the propaganda machine goes into overdrive -> passive, misinformed Americans are frightened into favoring more austerity and budget cuts)

    2) I love Germany’s logic. Germany thinks that they can kill their customers and then Germany turns around and expects their dead customers to continue buying German products. I love it! Come to think of it. That logic is also applied by the American rich also. That’s just great. The rich and the bankers of the world really are geniuses, aren’t they?

    1. YesMaybe

      I don’t think so. Even if Romney outraises Obama, it would be by less than a factor of two. It’s not going to be a factor of 8 like in the wisconsin race. In other words, Romney would be outspending Obama by less than Obama outspent McCain by. So the way I see it is that the election will be close if the economy stumbles on or gets better, and it will be a landslide if there’s a real crisis in the summer/fall (which of course was a key factor in Obama’s large margin over McCain).

    2. Jim

      So what should Cisco have done in 2001 when its market cap was higher than Apple’s is today? Should it have continued to provide vendor financing to so many clients that were not going to repay it? Or did it do the right thing by cutting them off from more loans?

      Libertarians, what’s your recommendation? That Germany commit to a fiscal union which will inevitably lead to PERMANENT FISCAL TRANSFERS of 7% of its GDP to the South?

      Those of you who propose a deposit guarantee, that’s precisely where it would lead. And perhaps that is what so many of you want – a United States of Europe, based in Berlin with Germany as the official language and all armed forced directed by a German commander.

      Well, it’s not what Germans or Greeks want.

      1. F. Beard

        Libertarians, what’s your recommendation? Jim

        I’m an anti-fascist but a universal bailout of the entire Euro-zone population, including German savers, with new Euros would fix everyone from the bottom up.

        1. Jim

          Except that only 40% of Germans own their homes, while 82% of Italians do.

          What you’re proposing what be a HUGE net positive for Italy and a net negative for the German renter.

          1. F. Beard

            and a net negative for the German renter. Jim

            Non-debtors would receive an equal amount too.

  5. F Libertarians!

    Someone should tell the Germans the simple truism that customers cannot buy your products if they’re dead…

  6. Hans Suter

    I sure knew that this moment would arrive. This is the day I got tired of al this backseat driver and armchair general’s opinions. See you again in three months, dear posters and commenters.

    1. Maju

      In this case I almost totally agree. Germany should not bail out anyone (maybe they should pay war reparations but not bail out anyone at all, cetainly not private banks).

      This game is however a game played by both: the Spanish bourgeoisie (wealthy cheaters) begs and charges the bill to the Spanish working class (humble taxpayers), while the German bourgeoisie agrees and charges it to the German working class.

      This has the following effects: Spain becomes a neocolony (more than it already was), the bourgeoisies of both countries remain at large, the grudges between people-nations grow, making less likely any pan-European working class unity.

  7. Don Last

    Do you really think that the citizens of Germany, France, Italy and the rest are going to renounce sovereignty and have a Brussels authority tell them what taxes they pay, what pensions they get and on what terms, etc etc., the whole fiscal thing?

    I often wonder if I am on the same planet as many who, like Soros, argue that this is needed, and indeed, is feasible.

    1. Rodger Malcolm Mitchell

      They already have renounced their sovereignty. They voluntarily surrendered the single most valuable asset any nation can have: Their Monetary Sovereignty.

      Those who don’t know the difference between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

      1. Mr. Eclectic

        As a Greek, and thus as one affected by this state of affairs directly, I still maintain that some loss of sovereignty, as a principle, may be a good thing. Sovereignty leads to wars, and international cooperation should remain the goal, especially here in Europe, a place where sovereign nations used to love killing each others’ populations.

        But this, this is madness. People are losing their control over their future, yet what we get is chaos, brewing hostility among nations, further world instability. Nationalism, bigotry, chauvinism on the rise.

      2. Jim

        Except that the German people were EXPLICITLY promised that they would never have to cede their fiscal sovereignty. If Germans do vote to do this, perhaps they will insist that German becomes the official language of the United States of Europe, and that all armed forces / police forces will be under the direct control of Berlin.

        1. psychohistorian

          What part of American Empire do you not understand?

          Germany, like Japan, is an extension of the empire. Germany’s special challenge is the integration of East Germans. I think that is one reason why home ownership percentages are lower than other countries.

          I hope some leadership emerges that sees the dead end that private money is for the 99% and builds creative public money alternatives that include utility functions like bill paying and limited credit but all the processing capabilities of credit/debit cards. If our government is “fleecing” its customers for the public commons, its going to be loads easier to correct than beating your head against private money systems.

        2. Min

          “Except that the German people were EXPLICITLY promised that they would never have to cede their fiscal sovereignty.”

          So were the Greeks. Things are not as advertised.

  8. Maju

    The greater union project is for 2018, what is a very remote future considering how things are. So it’s not any solution for now but something else.

    As for the main issue at hand: Spain should just let the banks fall and EU should insist they do. In fact the should have done that with Ireland to begin with, etc.

    Then they should build new public banks.

  9. Hans Maier

    “…Target 2 clearing system…any possibility of a euro exit by one of the euro member countries creates a risk of a currency loss to parties involved in the euro area banking system”

    This risk isn’t very high. Collateral is provided for almost all these transactions as they originate in money creation by the central banks. If a country leaves, and wants to steal the collateral, the euros in remaining eurozone bank accounts of this country’s citizens and companies will be converted by force into New Peseta, New Drachme or whatever the new currency is, which makes the “losses” of the ECB go away. And if the leaving countrys hand over the collateral, then we don’t know how much will be lost

    1. Yves Smith Post author

      Marshall Auerback’s reply:

      To stop such lender of last resort lending as long as there is adequate collateral would be to abrogate ECB procedures and rules and, in doing so, cut off liquidity financing to banks experiencing runs. This would force those banks to suspend deposit withdrawals. The failure of the ECB to perform its lender of last resort role in any one of these countries would immediately accelerate deposit runs in other European countries. This could extend beyond Greece, Ireland, Italy, Portugal and Spain to France and other countries. I do not believe any German government officials or ECB bureaucrats would take responsibility for such an outcome, even if they had the authority.
      · I believe that a German exit from the ECB to limit such Target 2 loss exposure is even less likely. Germany is bound by a treaty. Any move to exit would require some kind of debate and possibly a referendum in Germany. On the first move in such a direction a massive run would be precipitated on banks not just in the five distressed peripheral countries but in other countries including France as well.

      · Although all the flight deposit funds are going into German banks, under the ECB rules Germany’s loss exposure is limited to its 28% participation in the ECB. Were Germany to exit the euro, it would abrogate the Treaty. Its banking system, including the Bundesbank, might be exposed to almost all of such losses rather than the mere 28% under the current euro system. And, as I’ve said before, even this figure might overstate the extent of Germany’s current exposure, as the ECB is obligated by law to distribute its profits to the national central banks, but if it suffers loss of capital, I don’t believe that the member nations are legally OBLIGED to cough up additional funds. And why should they? The ECB, as an issuer of the currency, can operate with negative equity (indeed no equity) forever.
      · Lastly, any such German euro exit could cause its new exchange rate to soar which would be very adverse to its large international trade exposure. Furthermore, any such move that brought calumny to the banks elsewhere in Europe and thereby to those economies might greatly impair German international trade relations within Europe for a long time.

      Therefore, until somehow the ongoing bank run is stopped, possibly with deposit insurance, we should expect the bank run and the consequent ECB loss exposure to the European periphery to climb well into the trillions of euros.

  10. Ignacio

    I think this is a well focused analysis. If I can provide some support is in your suspicion that bank losses may be much hihger than anticipated, Spanish banks have created the myth that in Spain mortgages are always repaid. The myth is based on the 1993 housing bust, when interest rates were high but went down allowing the particulars to repay relatively easily, also helped by a fast recovery of housing. This time everything is different: mortgage rates cannot be lowered much, housing markets and prices are poised for a long slump, and the leverage of households is higher. Also, unemployment is still rising and austerity wont help to recover. In my opinion, banks are applying forbearance to many mortgages and they are not telling it to authorities since they created the myth.

    In my opinion, the spanish government, and many people in Spain, still believe in the confidence fairy. According to this story, once the bank rescue is acomplished, credit will flow again and happy days will bew back again. They do not realise that it is the highly indebted household sector the elephant in the room and credit cannot flow happily again until deleverage has been completed.

  11. Rodger Malcolm Mitchell

    Only the European Union can believe that lending more money to someone who can’t afford to pay their current debt, is a “bailout.”

    Spain is monetarily non-sovereign. To survive long term, all monetarily sovereign entities (including you and me, the American states, counties and cities, and all businesses) must have income.

    For a country, “income” is a positive trade balance. Taxes are not income.

    All of the euro nations, to survive long term, must have positive trade balances. Think of the mathematics of that.

    The euro is a dead man walking.

    1. YesMaybe

      Maybe that’s why the spanish FM insisted that this is “financial assistance”, not “a rescue” (and certainly not “a bailout”!).

      I just came across this quote for the first time yesterday. I’m not quite the right age for it yet, but I can see by analogy how it applies.

      “True terror is to wake up one morning and discover that your high school class is running the country.”
      — Kurt Vonnegut.

  12. Samuel Conner

    Perhaps the end state of the deposit flight to Germany is that Germany has to address the real problems in the periphery to protect its own claims on the periphery.

  13. briansays

    i understand the likely final for the current european soccer matches
    spain vs. germany

  14. anon48

    The case presented in the post is compelling:
    – The 100 million Euro rescue may not be large enough
    – The potential cost of the perceived increased risk hoisted onto the Spanish government for its role as a conduit to funnel the rescue package to its troubled banks could mitigate much of the impact of the rescue
    – The strings attached to the rescue could further damage Spain’s ability to go back to the well in the future

    I’m just that a significantly large ECB intervention as prescribed would not be anything more than another kick the can down the road exercise. The distortions of having a common currency and its continued inflationary effect along the periphery would continue to wreak havoc with their economies for years to come, while at the same time the wealthier nations would still continue to accrue the economic benefit of having undervalued goods and services. Hence, an ECB intervention does not solve the underlying problems created by the common currency.

    While a dismantling of the EU in its current form would be costly (and sad), the dynamics of the situation seem to provide an opportunity for some level of allocation of common debts of the union among member states as part of the withdrawal process. Further, it would allow as many have said, for the formation of a few smaller more practical tightly knit European unions that have more similar cultural, social, political and economic norms with which they may share. (I.e. The failures of the current union are now painfully obvious so it’s more likely the next versions would be structured more properly).

    The ECB, unlike the Federal Reserve, cannot provide the same level of long term investor confidence in the system because its foundation is based upon the same political uncertainty as is the EU itself.

    A strategy of significant ECB intervention would need to be recurring because of the current intractability of economic imbalances between member states. Because of its potential size and scale, continuing ECB financial commitments would have the effect of increasing the common debt of the member states exponentially from where it is now making the exposure much less manageable. Printing money may not be a long term solution either because of the continuing perceived risk of EU withdrawals. This perceived risk could greatly reduce the ECB’s power to expand the money supply without causing significant deflation of the Euro currency along with the associated radically divergent economic consequences bestowed upon the various Eurozone member states.

    After continuing massive ECB interventions, 5 or 10 years down the road there will still be the same level of political uncertainty but with a huge debt overhanging the union. Is it inconceivable that certain EU members, not yet fully incorporated into the Eurozone, may ultimately balk at the risk of full membership? Isn’t it possible that even current members may question the cost benefit trade off and conclude that withdrawal is the way to go?

    Further, massive ECB interventions still wouldn’t have created the political bonds cemented by appropriate legal, regulatory and enforcement mechanisms necessary to guarantee the union’s survival through future crises. Consequently, if the union were to disintegrate at that time, can we assume each country would vote willingly to assume its proportionate ownership share of a much higher ECB debt load? From a member state perspective, that would seem to be politically impossible. Ultimately, the financial exposure arising from disintegration under that scenario would be so large as to be totally and completely unmanageable.

    Unfortunately, the way I see it, that first ECB intervention may lock the member states of the EU into this subsequent chain of events, and the results will be much more catastrophic for them and the rest of us.

  15. Hugh

    Good article. This deal makes no sense to me. Spain is in depression, and the government is taking on debt it does not control, will be completely non-stimulatory, and will ultimately flow back to Northern banks. Essentially, the Spanish will end up paying Germany for the privilege of Germany bailing out German banks.

    Why didn’t Spain let its banks fail, guarantee the small depositors, and burn the rest: the equity and bond holders and the big depositors (you know before the bank run occurred)?

    1. Maju

      Why? Because that would mean that many bourgeois would have loses with possible domino effect spreading to (1) other Spanish banks, (2) other European banks (German, French, British and Dutch), (3) the whole global financial system. This is a “Lehman moment” made a “Goldman Sachs bailout” – European style.

      Spaniards are being sold out by politicians who are somehow managing to sell the banks as “us”, even if it is those very banks the ones who kick us from our homes and still keep demanding more and more money.

      And I am concerned because, even if we Basques have distinct fiscal regime, I’m sure we will end up paying for all: Spain, Germany, France and what not!

      I humbly request the citizens of Spain to raise up in arms before their very blood gets extracted as means of payment. Let Bankia fall, make a new bank if need be (it’s a lot cheaper for sure), get Rato and Aguirre in jail, make the true corrupt culprits pay.

      I also request the citizens of the rest of EU to raise up to block any attempt to use public funds to pay for bankster corruption.

      Let the banks fall, please. The sooner, the lesser evil.

      1. SR6719

        Maju: “I humbly request the citizens of Spain to raise up in arms before their very blood gets extracted as means of payment.”


        The Left seems completely paralyzed. What’s it going to take for citizens to rise up in arms against the financial gangsters?

      2. Jim

        Maju, it would mean much turnover at the top in Spain, which is precisely why the banks were saved. Current politicians feel “comfortable” with the current power structure; they don’t want to have to forge new friendships with a new class of Spaniards who would lead the new banks.

        Which is precisely why the Japanese never cleaned house two decades ago, and why President Obama decided to leave so many people in place two years ago, when he could have cleaned house.

        1. SidFinster

          Yea, verily.

          Note that Jim has given us a practical, no nonsense description of how things really work – no conspiracy theories posited or needed.

          Do Spanish people even have enough arms to “rise up in arms”?

        2. Maju

          First, the citizens do not have arms.

          Second, saying what I just said is a crime (robbing banks from the inside is not however), so I hereby declare it “poetry”, “art”… a metaphore of itself. Just in case.

      3. psychohistorian

        EXACTLY !!!!

        Someone please stop the music.

        Put private banking out of our misery.

        Nationalize the FED !!!!! and associated global organizations.

  16. craazyman

    La Mancha Dreams Under the Shadow of the Horse

    this is what would happen if the aliens landed and started showing off all their interdimensional high technology and telepathic communication abilities.

    the entire culture would collapse. just like the Aztecs collapsed in the face of the Spaniards and their guns and horses and Quezequatal myth vibrations and greater individuation.

    it’s clear that the northern euro nations have a somewhat more culturally familiar grasp of money technology — which by no means am I alleging is a morally or ethically superior system in the terms of its implementation — but it does abstract interpersonal consciousness and liberate imagination to a greater and more focused degree than do local tribally based communities.

    the latter are what are euphamistically called “uncompetitive” with the gargantuan machine hive brain of the Germanic engineer financed by the Anglo looter banker.

    And the local tribe communities built around nature and agriculture get steamrolled as the locals’ imaginations are tweaked into desiring the baubles they see as, in Mr. Soros’ quote of the psychoanalyst whose name I forgot, “fantastic objects”.

    Mr. Soros’ rightly terms the europroject a “fantastic object” and in that respect, and calls for its re-animation in some thought structure that can function in a messianic capacity to fuse the disparate shatters of the current European group mind. In that regard, he calls for the very Gatsbyesque romanticism that the monied interests have not the capacity, in their lust for what they deem to be potency, to even comprehend. He is correct.

    A unified Europe is the light at the end of Daisy’s dock that Gatsby looked out across the waters and saw not through his eyes, but with the higher power one of the most romantic, hopeful and potent hearts imaginable in a human incarnation.

    Mr. Fitgerald, in the last paragraph of his masterpiece, describes what it seems to me Mr. Soros is calling for, a form of persistence and imagination that does not describe reality as much as transforms it . . . “Gatsby believed in the green light, the orgiastic future that recedes before us. It eluded us then, but that’s no matter — tomorrow we will run faster, stretch our arms further . . . And one fine morning — So we beat on, boats against the current, borne back ceaselessly into the past.”

    1. LeonovaBalletRusse

      Yes, but Gatsby took the fall in the Big League. The “super-rich” play by a fierce code of self-protection, lethal actually, in which small fry and fools are sacrificed to “old line” interests sunk “full fathom five” in blood. Again, Old Europe with an America accent is recognized, again and again:

      “An American Tragedy” by Dreiser;
      “The Great Gatsby” by Fitzgerald;
      film: “Crimes and Misdemeanors” by Woody Allen.

      Old Europe’s “noble” blood and soil came to the New World by ship to corrupt from the ground up. Bram Stoker’s tale comes to mind. Never were we innocent or “good.”

  17. Enraged

    I find that interesting that Americans, with the problems they have, would spend so much time and energy discussing and analyzing Europe at the expense of rebuilding this country. Then again, this is the same America that is much more interested in what we do in our bedroom than resolving the foreclosure crisis and tackling down the 20% of children who go hungry. The same America who, in the early 1980’s, opted to bank everything on oil even though it knew that the reserves were not unlimited, having gone through the oil crisis of the 70s like everyone else. The same America who chose, centuries ago, to invest into making money for the sake of money rather than into the most important richess any country has: its people.

    The US economy, overly protectionist and protective of its elite, is going down at an increasingly rapid rate. BRICS countries are on the rise and the combined Europe economic power is still much greater than ours, regardless what Greece and Spain are currently going through. It isn’t going anywhere. Europe has weathered many storms and, this time, it will pull out despite America and its refusal to play by the ruled.

    America is going to be left lagging behind in a very short time. It is already lagging in space technology behind Russia, its infrastructures are a disgrace, the shape of its people is horrendous, healthcare is lacking for almost 25% its population and it has managed to destroy most of its cultivable soil. People fortunate enough to have two passports will be able to leave. Those who decided long ago that America was the standard by which everyone ought to think and live and who decided that its mission was to mingle into everyone else’s affairs and be the world’s police are in for a rude awakening.

    All America appears to be interested in is war, as evidenced by Obama’s warnings to China, Russia, Iran, Syria, etc. War used to be the main way to pull a country in economic difficulty out of it. It no longer is.

    In the end, two countries will be lefy behind: the US and UK. The two countries that, interestingly enough, circumvented everyone and everything to create the most destabilizing country in the world: Israel.

    Divine jutice is coming. Arrogance and lack of forsight will do us in.

    1. Hugh

      You can not solve a problem if you don’t understand it. Kleptocracy has regional variations but it is the political economic form for the US, Europe, the BRIC, East Asia, and the developing world. So no, the US is not going to go down and Europe somehow get off. And we discuss Europe because the major regional zones and players are interconnected. What happens in Europe and China is of critical importance as to what happens here. Finally, some of us have been engaged in this struggle for several years now. Welcome to the fight.

      1. Enraged

        What I understand is that 17 banks are going to be downgraded tomorrow or in the very short future, among which the 6 largest American banks. B of A is only in 9th position worldwide in terms of assets and liquidities and Chase in 10th position.

        Most of European banks are subject to such stringent regulations that, as Robert Mundell indicated, they will weather the storm much better than any American one. What I understand is that American banks, which are already too big too fail and uncontrollable and unmanageable are still merging to become yet more unmanageable (which is strictly forbidden in Europe).

        What I understand is that the US has pledge its gold to pay a large portion of its debts whereas the large European banks haven’t (except for the UK but they are not in the Eurozone). What I understand is that the US is much more fragilized than any other country and that’s the reason Obama is using the tough talks against Iran, China, Russia and anyone who refuses to play the Israelo-American card any longer. What I understand is that America will do whatever it takes to foment a war since, as everyone knows, the best way to pull out from an economic crisis is to declare war.

        1. Hugh

          Banks like Deutsche Bank and BNP Paribas are in the same class as the American TBTF and suffer from many of the same size-related problems. The Eurobanks have been notorious for being even more highly geared and undercapitalized than their American counterparts, and that is saying something. The US went off the gold standard in 1971. So I would love a link to the US backing its debts in gold.

          Again I would counsel further study of the European crisis, the very thing you consider unworthwhile.

        2. SidFinster

          You’re full of crap. Not to say that US banks are well -managed or in good shape, European banks are not more strictly regulated than their US counterparts, especially as regards the critical issue of leverage. Talk to the executives of a US money center bank and they are openly envious of the lack of regulation their European competitors face.

        3. Calgacus

          Enraged, you might have a point, you might be right. IF. IF the Eurozone had not imposed the Euro abomination on itself. The US has all the problems you speak of and more, it’s become a 3rd world country.

          But social technology matters. The Euro is the worst monetary system of all time, created during a period of the profoundest ignorance of basic economics. It is organized, centrally coordinated, institutionalized cannibalism. Cannibals & parasites may control US institutions. But their control, cannibalism and parasitism is not institutionalized, automatic, mandatory and invisible. The Eurozone is infinitely more fragile than the USA, the UK or China. The Euro institutions, treaties and the behavior mandated by them cause the crises, which can only be averted by “unsound” actions that violate Eurozone law in letter or spirit. The stuff about gold pledges in the US & UK is nonsense.

    2. Jumpjet

      Europe is not so strong as you think. Nor is China. Everything’s rotten and it’s all about to collapse, and there’s no major economic power that will escape it.

      And it will happen because the leadership everywhere, all over, is corrupt and craven. It serves those with much money and few scruples, stomping on the common people to curry favor with the elite.

      1. stripes

        Well they certainly have a lot invested in US buying their garbage. All of the Govts are fat as hogs and all of this was well planned. None of them are broke …… just faking it…like the banksters who don’t want to pay their debts to US or anyone. Boycott them. Vote out the traitor politicians.

  18. YesMaybe

    One thing about this plan. As I understand it, the government is borrowing in order to ‘recapitalize’ the banks. In effect, the government is lending to the banks. But the loans are reported to be around 3%. This is cheaper than the 6% the government has to pay on the market, but a lot more than the LTRO loans, which were 0.75% IIRC. So I wonder why the banks didn’t just borrow more during the two LTRO’s which would have been cheaper. The only answer I can think of is that they didn’t have any more collateral they could post to the ECB.

    Any thoughts?

    1. Hugh

      Interesting point. I would invoke my Common Sense paradox. If Spanish leaders had had the foresight to use the LTRO to forestall the present crisis, they would have had the foresight to head off events, like the housing bubble, which precipitated it. Europe, i.e. the European elites and leaderships, have been reactive throughout the 2 years of the Euro crisis. They have never been proactive. I look at this two ways. First, the Euro-elites don’t address a problem until it can’t be avoided, and second, in kleptocracy, crisis provides new opportunities for looting.

      1. YesMaybe

        That’s true. Though it would’ve been up to the banks, not the government, to borrow more from the ECB. But given the corrupt and bureaucratic nature of the banks, the same kind of reasoning probably applies to them as to their counterparts in government.

      2. Maju

        The leaders, most of them, knew all this all along. More or less: they knew it was a bubble and they did nothing about it. There is no statesmanship anymore: just petty robbers who take the money and run, and if you elect them again, take again the money and run.

        They actually haven’t got to run much in fact. They control all power mechanisms, including parliaments, media and tibunals…

    2. Maju

      The exact details are not known. The Spanish government is making a huge effort to hide them. All we know is that the IMF (read: Sarko’s sidekick Lagarde) suggested that Rato (former IMF director) was to be removed and the bank intervened urgently. We also know that much of the ruling People’s Party (conservative) is deep to the eyebrows in this stinky mud.

    3. Jake

      Not only do the Spanish banks not have any collateral now but the collateral they used previously has greatly dropped in value and, to top things off, the banks have had and continue to have massive bank runs. That is why 100 billion is merely a down payment. Get ready for shock and awe around September.

  19. Murky

    Complex topic. Soros’s recent article had a nice clarity. Saying basically the same thing as Yves Smith suggests: Probable meltdown of the Euro economic system. Actions being taken? Paltry. Too little, to late.

    What happens when the meltdown hits? Simon Johnson has described this scenario here:

    But there is some good news! Most of the big European banks will go bust, right? Isn’t that the sort of ‘creative destruction’ that clears out system rot?

    And the bad news: social upheaval and chaos on a massive scale. Wipe-out for euro citizens: of their bank accounts, pensions, jobs, and homes. Replay of the 1930s Great Depression, first in Europe. Then the contagion will spread to North America. The US banking system will teeter, then probably get bailed out again. Ordinary American citizens will float the bill, while losing their jobs, money, and homes.

    Paul Volcker’s recent article: “Is Global Financial Reform Possible?” He suggests specific reforms, but is not optimistic about their implementation.

    What do you all think? Can the system still be fixed? Or is a forthcoming crash and burn of the global economic system inevitable?

    1. Maju

      Their plan is that the big european banks will not go bust. Their plan is to drain Europe dry so they do not.

      At some point however people will start pouring to the streets in anger… they are doing it “controlledly”, by sections, so they can better control and manage that legitimate rage.

  20. rps

    Heck, the good ole USA has done their part in helping Spain. Our corrupt politicians have been bought off, and in turn, generously sold-off public roads and systems to Spain. Take Mitch Daniels–Please!, he handed over The Indiana Tollroad to a Spanish-Australian consortium offering $3.8 billion for a 75-year deal. Then there’s that humble humanitarian Mayor Daley along with ‘Merika loving Goldman Sachs who brokered that and the Chicago Skyway 99yr lease to the same consortium. The same Spanish-Australian partnership that won the 99-year Skyway lease in late 2004 was selected to manage, maintain and upgrade the Indiana Toll Road until 2081. Cintra Concesiones de Infraestructuras de Transporte, S.A. of Madrid owns and operates airports, parking lots and tollways across the globe. I could go on, but why bother.

    Public Private Partnerships…Hehehe, what a catchy phrase! As they drain the communities coffers while stealing public assets and avoiding taxation in Dubai!

    “Smell That? You smell that?”
    “Greed, son. Nothing else in the world smells like that”

  21. F. Beard

    Can the system still be fixed? Murky

    Why not? Steve Keen’s “A Modern Jubilee” would fix everyone from the bottom up and a ban on further credit creation would prevent the problem from reoccurring.

    Or is a forthcoming crash and burn of the global economic system inevitable? Murky

    Not inevitable given that the world cannot afford another world war.

  22. Hugh

    Can the system still be fixed?


    Will it?

    Probably not. It would require us overthrowing and removing our elites and the kleptocrats they serve.

  23. Ms G

    I was reading Le Monde’s coverage of the Spain Bank Bailout and the comments published in response. Here is one of them (my English translation first; French original below.)

    Joseph 10/06/2012 – 16h09

    “The ECB, central bank, lends 625 billion euros to the private banks at .25% interst. These banks then re-lend a part of this to the states [countries, e.g., Spain or Greece or Ireland] at 2, 8 or even 30% interest, and then have fun at the Casino with their clients’ money. They [the banks] then find themselves on the brink of failure and turn around to ask these same states (clients) to rescue them — by teleconference (an email would have sufficed) and the states then lend them 100 billion Euro with no strings attached. Meanwhile, austerity measures rain on the people. Awesome European Union!”

    [Now the original French version]
    “La BCE, Banque centrale des États, prête 625 Mds d’euros aux banques privées à 0,25%. Ces banques en reprêtent une partie à ces États entre 2, 8, voire 30%, puis s’amusent au Casino avec l’argent de leurs clients. Elles sont ensuite au bord de la faillite et viennent demander à ces mêmes États par téléconférence de les sauver (un mail aurait suffit) en leur accordant une aide de 100 Mds sans contrepartie. Et pendant ce temps là, les mesures d’austérité pleuvent sur les peuples. Super UE !

    1. SR6719

      Thanks for translating that.

      So was Maju right in his comment above when he said we’re looking at a “Goldman Sachs bailout” – European style?

      And still no hopeful signs, no calls for a General Strike, no bankers hanging from lamp-posts, nothing.

      Is there never any good news?

      So I guess this means Wall Street types will be jumping up and down and shitting themselves from joy at the prospect of inflicting even more human misery.

      1. psychohistorian

        They will think of new ways to cast their shitting for joy as part of the trickle down effect…….just hold your nose.

        1. Ms G

          I wish I were an expert in this field, but I’m just one of those trying very hard to get it (and without any expertise or background in finance or banking).

          But the French gentleman’s description of the money flow sounds a lot to me like like circle here: the dollar flows from Treasury and the Fed to the private banks in the US (and actually back door to foreign banks and sovereigns, see eg, AIG backdoor bailouts) and from the private banks into loans back to the US govt (buying up treasuries) but also (here) into rich bonuses for bankers and then another round of speculative betting including derivatives and swaps. Meanwhile, in both countries, the citizens/taxpayers are left to churn in joblessness, spiraling poverty and the destruction of all safety net programs “because we just can’t afford it” (now that all the money is going to stabilize the banking system and make it possible for banks and countries to borrow and bet all over again).

          An NC poster recently said that they are tired of hearing governments screaming poverty while these bank bailouts are going on — when will the cry shift to “we can’t afford the banks anymore”!

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