Spain seems to have agreed to accept €100bn of bailout for its banks. The only meaningful difference between why this happened and why Ireland had to be bailed it is because Ireland nationalised its banks and their losses, something Spain thankfully seems to be reluctant to do.
At least, that’s what’s being briefed. Given they’re still denying even asking for this, the details seem likely to change before the markets open on Monday, but the narrative so far requires this to be a done deal by then or everything’s going to go on fire. Which is good for Spain, and probably why they’re not being forced to impose even greater austerity than they were signed up.
What’s potentially more problematic is that Spain isn’t following the Icelandic route and hanging their arguably endemically corrupt banking institutions out to dry. In attempting to keep them going, and there are good arguments as to why that’s necessary (the Caja system is largely funded from small depositors, despite a surge in regional government bond holdings recently), the Spanish system is becoming increasingly reliant on the relatively powerless central government to manage the economy.
As it does so it inevitably becomes increasingly dysfunctional: the asymmetric federalism of the Spanish system has been unable to either reduce their deficit, because the regions refused, or coordinate an effective fiscal stimulus to keep things going.
One of the bellweathers of the global economy is the Baltic Dry Index, which represents the cost of moving raw materials by sea. This is important because it’s an efficient indicator of expectations about the future that isn’t open to revision or speculation. It’s fallen a quarter in the last month, and a half since January 6 months.
I don’t have a good solution to propose. Eurobonds are politically problematic for the countries that would underwrite them, even though they benefited from the artificially low exchange rates during the boom. Equally, mutually agreed splits into a “hard” and “soft” Euro would cripple the hard-zone exports and the soft-zone debts and domestic demand. Even an orderly exit by Greece would be catastrophic and wouldn’t solve the problem.
To be honest, the closest analogy I can think of is the credit crunch of 2007, right before Northern Rock went under. It seemed bad at the time without anybody really realising the next few years of economic Armageddon that would follow, and that was with a globally coordinated policy response.
That’s not where we are now. The risks are greater: we’re talking about large nations becoming insolvent, not just large banks and small nations. The relative size of possible response are smaller: a countries GDP is, almost by definition, larger than it’s banking sector.
Most worryingly, there’s an absolute vacuum of leadership. Few of the current set of world leaders really understand what’s going on, fewer still have the domestic political capital to use and none of them have the international standing required. Obama is hobbled by a frankly insane legislature, Cameron is set on playing the ingenue, Merkel is constrained internationally if not domestically and Hollande hasn’t either the strength of personality, intellect or international credibility required.
ETA: To sum up, this classic movie clip
#1 by dcomerf on June 9, 2012 - 10:50 pm
I think you mean Ireland socialised, not privatised, the losses of its banks.
#2 by Aidan on June 10, 2012 - 11:07 am
oops, yes, so I do – thanks!