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Spanish Bailout: Fail in Record Time

Early news from Europe this morning: the relief from the Spanish weekend Spanish bank bailout has already begun to fade. Spanish bond yields are rising despite the bailout and Italian bond yields are also rising. (Rising bond yields mean that investors demand higher interest rates to hold the debt of a given country.)  In the past, European quick fixes have bought weeks and months of calm; it’s beginning to look as if the Spanish bailout bought hours.

Europe did its usual thing last weekend, kicking the can down the road. A $125 billion plus bailout of the Spanish banking system would, the eurocrats expected, buy some time. They didn’t have any particular plans about how to use that time to fix the underlying problems of the troubled eurozone, but anything is better than a financial panic and a catastrophic meltdown.

Unfortunately this time the can doesn’t seem to have gone very far down the road. Investors seem to be losing faith in Europe’s ‘hope-something-turns-up’ strategy for solving the biggest financial disaster since World War Two. If true, that is very bad news for us all.

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  • Sapper

    Good article, short and to the point. These 3 paragraphes sum it up folks. The bandaids are not enough to stem the gushing fiscal disaster we have on our hands. Get ready! Prepare! Hard times are coming.

  • The Reticulator

    When the message just prior to the bailout was, “We’re from the EU government and we have ways to make you want our help,” you can’t expect everyone to be happy with the result.

  • JCP Brown

    On the radio in my car at noon (France Info), I heard an interview with someone from Credit Suisse (i believe) sing the praises of the bailout and how everything is gonna be alright. That’s the vibe I’ve getting from French media: a “whew! Spain’s gonna be OK”.

  • egoist

    Non-taxpaying IMF head Lagarde said we’re happy to help. “we’re” is me. Awesome, the way such evil people (looters) can look like “all the lovely people”.

  • Stephen

    The wonder is that anyone thought this would work. If I understand the terms of the Spanish bank bailout, it seems that the ESF and other transfer agencies declined Spain’s invitation to transfer funds directly to the troubled banks preferring instead to loan the government of Spain 100 billion euros.

    Hmm…I thought that increasing sovereign debt tended to increase borrowing costs going forward. So the plan is to implement a short term fix which may not be sufficient for the short or long term (even the Spanish government doesn’t know the full extent of their banks’ insolvency) in exchange for increasing the cost of borrowing to Spain and risking a further downgrade of the Spanish bonds? As I began: Why would anyone think the plan could work?

  • Ed Snyder

    “You’re gonna need a bigger boat.”

  • Mrs. Davis

    This is not bad news, it is good news. That is not to say it will be pleasant for a while. A junky’s first night of getting clean and sober is never pleasant. But it’s a necessary step to returning to a productive life. And the sooner it is taken, the better.

  • Charles R. Williams

    “Kicking the can down the road” means one thing, buying time by shifting debts from insolvent countries to solvent countries or creating the appearance of doing so. At the same time new debts pile up. Even the German economy is dependent on insolvent nations continuing to run primary deficits.

    The bottom line is that the eurozone as a whole is insolvent and its collapse can only be postponed. As far as financial markets are concerned, there is still money to be made as long as you get to the exits first when this house of cards collapses. Hence, each fix will work for a shorter and shorter time.

    When Europe collapses, exports from the rest of the world to Europe will decline but we will not see a “Lehman” event. Key elements are missing, first of all the element of surprise both with respect to the bankruptcy and with respect to the policy response. Second, American banks are not questionably solvent as they were in 2008. There has been plenty of time to minimize exposure and to strategize about opportunities that a financial collapse in Europe would create. Finally, the more solvent nations in Europe will almost surely bail out their own banks if they are able.

  • Jacksonian Libertarian

    I want the collapse to come sooner rather than later, so I’m encouraged to see things coming to a head. The Euro was always a bad idea, and the smart money stayed out.

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