Europe has real problems; while Europeans have been suffering for years with huge cuts to social services – their politicians are pushing for ways to come up with $100 billion to give to Spanish banks who are in threat of being insolvent. European banks have resisted maintaining capital cushions imposed by Basel III which regulates minimum global banking standards, but now we know what experts have known for a while … many European banks do not have enough capital reserves. If Greece, Spain, Portugal and Italy are at risk … it could bring down the entire Eurozone.
Paul Krugman writes HERE:
Oh, wow — another bank bailout, this time in Spain. Who could have predicted that? The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed…Spanish banks did indeed need a bailout.
Spain was clearly on the edge of a ‘doom loop’ — a well-understood process in which concern about banks’ solvency forces the banks to sell assets, which drives down the prices of those assets, which makes people even more worried about solvency. Governments can stop such doom loops with an infusion of cash…Even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless.
The Wall Street Journal adds HERE:
Spain’s acquiescence to a bailout of as much as €100 billion ($125 billion) for its banks is a prelude to a much bigger question: Will Spain need a bailout for itself? Some in financial markets say it ultimately will, and that Spain faces a daunting struggle convincing reluctant creditors that the country is a viable borrower…Whether Spain can avoid another bailout, for itself, is crucial to the future of the euro zone as it enters a tumultuous summer. Greece holds elections next Sunday that could set it on a path to leave the currency union. Italy is laboring to refinance its own giant debt pile under immense scrutiny. Amid these threats to the euro, a full bailout of Spain could be a cataclysmic event. Spain’s economy is the fourth-largest in the euro zone–larger than those of Greece, Portugal and Ireland combined. Finding the funds for a rescue would greatly strain the euro zone’s bailout vehicles.
The Washington Post adds HERE:
Spain was forced to seek a bailout this weekend, becoming by far the largest country to need help during Europe’s 2 1 / 2-year-long economic crisis…Fears that a Greek rejection would send markets into panic about the currency union’s future pushed Spain to seek the aid ahead of Greece’s election. But the mere possibility of a victory for anti-bailout forces in Greece helped exacerbate Spain’s problems in the first place, boosting its government’s borrowing costs and causing a slow-motion bank run that weakened its financial system. That spiraling confidence problem — in which the 17 countries that share the euro currency are united enough to spread their problems to one another but not enough to guarantee an end to them — is what Europe’s leaders are racing to fix with a road map to further economic integration that could come at the end of the month.
