We are dealing with a bank solvency led financial crisis.
There is only one approach that works to end this crisis and that is adoption of the Swedish model with ultra transparency.
All the bailouts are is an expensive waste of taxpayers money while policymakers pray for a miracle and bankers continue to collect their bonuses.
As Bloomberg's editorial board put it,
The challenge of bailing out Spain’s banks is compelling Europe’s leaders to confront a question they had hoped never to contemplate: How to prevent financial and economic malaise from overwhelming the euro area’s fourth- largest economy.
So far, their actions suggest they’re sticking with the strategy they pursued in [Ireland and] Greece and expecting different results. They’d better think again.
The agreement last weekend to provide as much as 100 billion euros ($125 billion) to Spain’s banks shows Europe’s leaders are at least beginning to recognize the magnitude of the task.
The amount matches some of the higher estimates of the capital the banks will need to offset heavy losses related to Spain’s real estate bust.If all that was needed was 100 billion euros, why go through a bailout at all. According to an IIF report, Spain's banks generate almost this amount of capital in a year.
As such, it might help inspire the confidence necessary to slow the flow of money out of the country and lower the odds of an all-out bank run, particularly if Sunday’s Greek parliamentary elections set that country on a path to leave the euro.Actually, the bailout sends a clear message to Spain's depositors: run.
The deal, though, fails to address a fundamental issue that has been spooking markets: This is the worst possible time for Spain to borrow 100 billion euros. Under the agreement, any amount used to bail out Spain’s banks will be added to the country’s government debt, potentially pushing it to a net 70 percent of gross domestic product, from about 60 percent today. Spain is already struggling to sell its government bonds to anyone other than its own banks; the sudden increase in debt could completely cut it off from private financing.
A market lockout would force Spain to ask the troika -- the European Union, theEuropean Central Bank and the International Monetary Fund -- for the money it needs to cover its budget deficit, one of the euro area’s largest. If Greece is any indicator, that assistance would come with tough conditions, requiring Spain to exercise extreme austerity as its economy is mired in recession and its unemployment rate is approaching 25 percent. The Greek fiasco shows how well that works.
Investors recognize the flaws in Spain’s bank bailout deal.
Even as the European stock market surged yesterday, Spain’s borrowing costs rose. The yield on the 10-year bond stood at 6.47 percent Monday afternoon, up from 6.17 percent Friday.
Watching Spain’s predicament worsen is particularly galling because the country is solvent and capable of solving its problems.True. All Spain needs to do is adopt the Swedish model with ultra transparency and its banking and economic problems would be solved.
It is the ongoing implementation of the Japanese model that is squashing Spain's economy and undermining is sovereign finances.