Euro crisis is now about avoiding an even larger Lehman moment | will they be forced to nationalise the banks?
The Euro crisis originated with the PIGS (Portugal, Italy, Greece and Spain) otherwise known as the peripheral economies. At first it was believed that the problems in those countries could be managed with a straightforward bailout with the set up of a bailout fund, and some haircuts for bondholders.
However the brilliant Euro economists forgot that the bondholders are primarily European Banks. The haircut, which is a write down of an asset (bond issued by a PIGS country) , eats into their capital base.
This required bailout provisions for banks in Greece and now Spain. The Germans insisted on this support being routed through the Spanish Government.
That latest development brought swift reaction from the IMF today.
Berlin has been particularly resistant to using the eurozone’s €500bn bailout system to directly recapitalise banks, insisting rescue loans be funnelled through national governments to ensure repayment. But such loans add to sovereign debt levels and an EU bank bailout for Spain – which could add as much as €100bn in debt to Madrid’s books – appears to have spooked sovereign bond markets, with Spanish borrowing costs reaching euro-era highs in the week since the rescue was announced.
Now it has gone full circle with undercapitalised banks and undercapitalised countries. There is no easy way out. Germany and the other large Euro economies are left with the challenge of whether to break up the Euro zone would create as much or more economic upheaval and further bank runs as would providing the enormous support needed.
It’s a tough call, but we are unquestionably on the brink of a Lehman moment of larger scale than the September 2008 version. The difference is that the 2008 moment was not presaged by months of debate and public disagreement. It was sudden and the Fed were quickly able to take actions to thaw the market freeze that was only known to a few.
This crisis is different. The months of bickering have publicly aired all the dirty laundry for the public to see. Here we see Credit Agricole eating a €6bn write down as a result of runs on its Greek subsidiary, and that’s just the beginning.
I wonder for the first time, if the Euro zone will have to nationalise all the large banks in order to manage an orderly entry into a proper economic and fiscal union.