Monday, 5 March 2012
The Spanish Situation
Indeed, Mario Draghi's money printing has created an even bigger monster of a problem for the Eurozone going forward. Zombie banks have been given a lifeline that will last for years, no white heat of Capitalism to refresh the system and cancel the bad debts. Instead, free money is offered so that the payments can be made to cover the interest on the bad debts. Indeed, the banks are buying up dodgy European Sovereign bonds which high coupon payments to help them offset losses on other parts of their books.
There is no real market for debt; that is dead in the Eurozone. Only the Central bank provides liquidity which makes the Eurozone look remarkably like China in the structure of its capital markets - China still be a communist super-state we should remember.
However, this situation is carefully designed to last for years, the idea being that as the bad loans roll-over or are slowly written off.
Spain, however, is today showing where the crisis will come back though. It's missing its austerity target. Spain too does not fit the mould of the other PIGS, Spain did not run up a large debt - Spain suffered from having interest rates too low which spiked a massive property bubble, the bursting of which has in effect reduced the GDP by 10%.
Worse, a lower exchange rate would soon sell-off all the unwanted property to retiring Northern Europeans; but this can't happen inside the Eurozone.
What can be done then when Spain misses its targets and needs a large bailout for the Germans to sign-off? We will have to wait and see, but for sure the Eurozone crisis will be back at some point this year and the mood of the markets will return to emotional state of late last year.