Spain’s Blood Wedding, Ireland’s Muted Rage, Europe’s tragedy

Federico Garcia Lorka’s 1932 play The Blood Wedding (Bodas de Sangre) focused on a wedding that, in the end, never took place. It symbolised the long shadow cast by a hidden crime upon the nation’s dallying with the prospect of deliverance. It also foreshadowed the tragic events that consumed, not just the playwright, but the whole nation, only a few short years later (as captured in Picasso’s Guernica better than by any historian’s pen). Today, we have another Bodas de Sangre in the making. A postmodern version. All of the tragedy’s elements are here, except for the splendid prose and poetry of a Lorka. Instead, we have inanities from Mr Rajoy, from Brussels and from Frankfurt. Meanwhile, a stunned audience in Madrid, in Dublin, in Barcelona, in Cork, in Paris, Athens and Rome are watching, listening, eager for some ray of hope. To no avail. For there is none.

Spain treading on Ireland’s shaky footsteps

Spain’s pain is not novel. It is a carbon copy of Ireland’s. A period of ponzi growth was occasioned by money-capital fleeing the metropoles of financialised capitalism, toward places like Spain and Ireland, in search of higher returns. It found its lucrative returns in a bubble created in the real estate business, aided and abetted by local banks, developers, politicians. Then, Wall Street came crashing down, capital fled (as is its wont at times of financial implosion) and the losses of the banks were passed on to states (the Spanish and Irish governments) which had been, interestingly, running a very tight ship for some time before the Crash. The change in political personnel made little difference. No state, however tightly or austerely is run, can survive (a) once mountains of losses are deposited on it, and (b) when it has no Central Bank of its own to help it remain afloat.

Just like Ireland’s government almost two years ago, so Spain’s now went through the same emotional cycle. First, they refused to accept that the state and the ‘national’ banks were embraced in deadly embrace that condemned both to insolvency. Denial caused angry rejections of the notion that the country would seek EU assistance. However, frustration was bound to follow the realisation that no other avenue was open to them. And, lastly, the bailout was announced in almost triumphant terms – as the road to national recovery and a demonstration of the wonders of European solidarity.

Tragically, of course, Spain’s ‘bailout’, exactly like Ireland’s, will achieve none of that. All that has happened is that proud nations like Ireland and Spain have now joined Greece and Portugal in the Workhouse that is the EFSF-ESM; the Temple of Ponzi Austerity. Structured as a giant CDO, the whole edifice is spearheading the disintegration of the Eurozone, with untold costs for the whole of Europe. If Greece was the canary in the mine, and Ireland the harbinger of a systemic Eurozone-wide crisis, Spain is the portend that Europe’s Reverse Alchemy has now began, dissolving the fabric of countries that, unlike Ireland, are too large to ignore.

Yet again, Europe avoided doing the rational thing

What would the rational thing be? For two years now we have been shouting from the rooftops (in the context of our Modest Proposal – see Policy 1) that unifying the Eurozone’s banking systems is a prerequisite for arresting the Crisis. A single currency area cannot afford to have separate banking sectors that are supervised by national governments. It is nonsensical to speak of Spanish banks, French banks, Irish banks and German banks when, by Treaty, Spanish and Irish citizens have the right to wire their deposits at will from one jurisdiction to another, with these transfers immediately switching from ‘assets’ of one national Central Bank to the ‘liabilities’ of another (i.e. the Target2 and ELA system of within-Eurozone capital movement accounting).

What would that mean in practice? It means that the moment a nation-state is incapable of keeping afloat its ‘national’ banks, following a financial and real estate disaster, the recapitalisation of banks must not only be done with European money (as in the case of Ireland and Spain, among others) but, crucially, it must be taken out of the nation-state’s business (and national accounts) altogether. In short, banks must be Europeanised. Period. That would mean three things:

  1. Banks must be supervised by a proper European Banking Authority (which unlike the current EBA should not be a confederacy of national banking authorities)
  2. Capital injections from the EFSF-ESM must proceed in exchange for common shares that the EFSM-ESM then holds, and which are used in association with the reconfigured EBA to appoint new managements in the failed banks that are at an arm’s length from national politicians (thus, dissolving the cosy relationship between national politicians and bankrupt bankers)
  3. These capital injections should not add to the sovereign debt to the nation, as the banks will no longer be national but Europeanised institutions.

When Stuart Holland and I suggested the above, two years ago and as part of the Modest Proposal, our suggestion was met with a deafening silence. Nowadays, it is almost a conventional wisdom (see Lorenzo Bini Smaghi’s recent article in the FT). A conventional wisdom which, nonetheless, Europe’s powers-that-be have chosen to ignore.

What they did: The essence of the Spanish ‘bailout’

It is now clear that of the three recommendations above none will be implemented. The third one, and most important for the purposes of ending the deadly embrace between state debt and banking losses, has been roundly rejected: The money that will flow from the EFSF-ESM into Spain’s banks will weigh heavily upon the Spanish state’s public debt. Just like in the case of Ireland, but also Greece and Portugal.

The second recommendation is, quite scandalously, ignored as well. Europe’s taxpayers’ money will flow to the banks but, yet again, Europe’s taxpayers will receive no equity in return. Will Spanish taxpayers receive it? Possibly, even though judging by the Greek example it is not certain. But even if they do, it is a poisoned chalice since that equity will come hand in hand with the spiralling out of control of the death dance between their state, their recession and their banks.

Only with regard to the first recommendation is there some mention of enhanced EU supervision of the Spanish banks. But unless we have a new EBA that is empowered to carry out its own stress tests and accounting checks, rather than through the Spanish supervisory authorities, none of this is credible.

In short, of the three things that Europe had to do in order to address Spain’s banking crisis they did almost none.

Difference with Ireland’s bank bailout

The Spanish ‘bailout’ differs from the Irish in four respects. These differences suffice for the Irish people to demand of their government to renegotiate its deal with the troika. But they are not such as to justify Spanish hope that the Spanish ‘bailout’ is a ‘lighter’ version that Ireland’s and, thus, that it offers hope denied the Irish. Let’s look at the fous differences one at a time:

No IMF involvement

Unlike the past three ‘bailouts’, the IMF will not be lending Spain any money. It will just play the cameo role of Sherriff to the EU-ECB’s protagonist part as Lord and Master. The explanation for this is that the Spanish bailout has been proclaimed as a partial program; a euphemism that allows both Madrid and Brussels-Frankfurt to maintain the illusion that the Spanish state does not require assistance; just the banks. But because the IMF is not allowed by its own charter to inject money into banks, it chose to ‘sit this one out’, providing only ‘technical’ assistance.

I buy none of this! Now, I would have no objection to the claims that (a) an EFSF-ESM recapitalisation of Spanish banks might have helped the Spanish state overcome its fiscal crisis, and (b) that the IMF’s charter stops it from helping just Spanish banks IF AND ONLY IF the ‘bailout’ billions did not count as part of the Spanish state’s sovereign debt. Then, the banking crisis could have been decoupled from the state’s fiscal crisis and any IMF contribution would have violated its charter. But since our recommendation no. 3 (see above) has been ignored, and Spain’s debt will burgeon, then the Spanish situation remains hopeless and the IMF’s excuse for ‘sitting this one out’ strikes me utterly unconvincing (think about it: since any monies lent by the IMF would have been added to Spain’s debt, it would have injected money into banks only via the national coffers – just like it did with Ireland).

In conclusion, the absence of the IMF in the Spanish case has nothing to do with the Spanish ‘bailout’ being one for the banks whereas the Irish one was for both the state and the banks. As long as the sovereign is lumped with the money that will end up with the banks, the Irish and the Spanish cases are indistinguishable. The only difference is that the IMF is, clearly, becoming jittery with Europe’s bailouts and was looking for an excuse to stay out of this one; in view of the enormity of the Spanish black hole. A decision that Madrid welcomes as it tries to convince the world that its ‘bailout’ is not really a ‘bailout’. At least not of the sort that afflicted Ireland (not to mention Greece and Portugal).

No strings attached, i.e. no formal austerity program

Before the Irish ‘bailout’, the Fianna Fail government of the time had already imposed upon the Irish people harsh austerity measures that were much applauded by Brussels, Frankfurt and Berlin. Yet, when the time came to sign the troika deal with Dublin, Europe demanded further austerity measures. Not because they made macroeconomic sense (quite the opposite was true) but because Berlin insisted that any ‘bailout’ should be portrayed to other Eurozone members-states as entering a hideous Workhouse that no able bodied worker, or nation as in our case, would ever step into voluntarily.

Spain has also imposed upon itself savage austerity measures over the past two years. Of course that, in itself, would not stop Berlin from insisting on new austerian strings attached to the Spanish ‘bailout’ – as they did in Ireland’s case. However, there are two differences with the Irish case.

First, between the Irish and the Spanish ‘bailouts’ we have 18 months of the Crisis’ evolution. During these 18 months, the ECB has unleashed its  1 trillion LTRO as a backdoor ‘bailout’ of Italy and Spain. However, before going ahead with this the ECB had negotiated both with Rome and Madrid massive austerity and ‘reform’ (effectively attacks on the rights of workers) packages. Packages that were implemented by Mr Rajoy and Mr Monti. In addition, Spain has cut  27 billion from its budget this year and has promised to repeat this bloodbath next year. In short, Europe has already exacted its pound of flesh from Spain during the past few months.

The second reason is that the scope of deterrence has diminished as contagion has spread to… Spain. Indeed, the point of putting Ireland in the Workhouse was to deter Spain from seeking refuge there. But now that Spain has been admitted into the same Workhouse, what is the point of imposing further cruel and unusual punishment on it – especially given that it is in agony anyway? Who is going to be deterred now? Italy? Given that Mr Monti is valiantly trying to introduce the policies that Berlin wants, and given that it is now evident that entering the EFSF-ESM is not a matter of choice (for the purposes of shirking austerity’s logic), the formal announcement of a new austerity program for Spain was deemed unnecessary. In any case, informally, the Spanish people should brace themselves for a spike in austerity, following this ‘bailout’, much like the one the Irish have been suffering (on the behalf of their bankers) since their own was signed and sealed. Only it will be called something different…

The possible involvement of the ESM

It is not yet clear which part of the Spanish ‘bailout’ money will come from the existing EFSF and which from the soon to be introduced ESM. This matters because the larger the portion of the ‘dough’ that comes from the ESM, the worse the bailout’s impact on the Spanish state’s refinancing (or fiscal) crisis. Why is this? Because national debts to the EFSF have no priority over other debts whereas debts to the ESM have priority (or super-seniority, IMF style). This means that for every billion that the Spanish government borrows from the ESM (as opposed to the EFSF), investors around the world will know that, if Spain at some point cannot repay its loans, they they stand to lose (with certainty) a larger portion of their investment (as the Spanish state is forced to repay the ESM every last euro before repaying other creditors). Which means, of course, that private investors will be even more reluctant than now to lend Spain. Which means that Spain’s bankruptcy is that much closer. At least Ireland has, so far, avoided this trap – although any new loans that Dublin gets (as a result of the Irish people voting ‘correctly’ at their referendum) will probably come from the ESM.

Real estate prices have not bottomed out in Spain

Ireland lives in fear of the extent of its banks’ future losses. The Irish state has effectively guaranteed the Irish banks’ future losses (contingent debt) without having a clue as to what these losses will be. However, at the very least, there is some degree of confidence that real estate prices (which are closely connected to banking losses) have bottomed out in Ireland. This gives the Irish a smidgeon of  clarity. The future does not look good but at least there is less fog surrounding it. In Spain, by contrast, the downward dynamic of real estate prices is nowhere near a resting point. Some say that real estate has another 40% to lose before it reaches equilibrium. Which means that the banks’ black holes may be much larger than it seems. And given Europe’s determination not to Europeanise the banking system, this means that Spain’s death dance is at an early state (when compared to Ireland) of its repulsive progress.


Spain could, and ought to, have been the terrain on which to end the deadly embrace of public debt and banking losses that is bringing the Eurozone down. Europe, in its infinite idiocy, decided against such action. The differences between the Spanish and the Irish ‘bailouts’ are real but insignificant. They are real enough to encourage the Irish to question their own bailout’s terms and conditions. But they are not substantial enough to give out any hope that Spain has been helped. Instead, it is abundantly clear that a new Blood Wedding (between banks and the state) is the order of the day in the land of Cervantes, Lorka and Picasso. A Wedding that will never be consummated, courtesy of the unspoken crime that overshadows it. And just like Lorka’s play, it will end up in a blood bath of unwarranted pain and desperation that threatens to consume, just as it did in the 1930s, the whole of Europe.


  • Yani:

    You say: “Europe, in its infinite idiocy, decided against such action”.

    No, it’s not Europe. It’s Merkel and the Bundesbank, in their infinite idiocy, that decided against such action.

    Until and unless you learn to call a spade and spade, your proposals will go nowhere. You seem to have some distinct inability to assign blame by name where blame is due. Talking about “Europe”will never get you to a solution. By now the whole world knows that it is Merkel and the Bundesbank.

    Avoiding to name the guilty is a major shortcoming of your approach. Name and shame.

    • Dean,
      Draghi is not Merkel and Bundesbank.

      ECB, EC and the dozen or so Goldman Sachs and CITI Bank alumni running Euro area central banks and dangerously large banks throughout the world are just the “tells” of the bankers coup that has just about taken over the world. Merkel is the mascot of the coupsters.

      Yes, she has been critically instrumental in covering up the coup, but she is not the coup.

    • Dean, just so I know, do you see Merkel’s apparent resistance to the ECB proposals for sorting out the Euro debt problem, ie Eurobonds? And what is your explanation for Merkel’s and Germany’s apparent resistance to EU plans re Eurobonds?

    • David:

      I am sorry but if you haven’t understood yet that the ECB and the bundesbank are in the opposite ends of the spectrum, then you are beyond hope.

      Mixing everything together in a eurosoup of nonsense shows great confusion on your part. Why such out-of-depth comment?

    • Richard:

      There are better ways to achieve what needs to be done other than Eurobonds. Same effect, different approach.

      What Merkel wants or does not want it’s irrelevant to the world at this point. The fact that a 100 Bil. euro Spanish rescue gets less than a yawn in the global markets (perhaps half day’s worth of a reaction, if that) goes to show you that the rest of world has had enough with Merkel’s minimal, incremental and incomplete measures.

      Merkel is a goner. Her opinions or domestic problems pale in comparison to the global needs. The only avenue left for her and Germany is to shape up fast. We are up to here with her compound nonsense.

  • “the losses of the banks were passed on to states (the Spanish and Irish governments) which had been, interestingly, running a very tight ship for some time before the Crash”

    A much overlooked point. I wish @paulmasonnews was brave/strong enough to cast you on @BBCnewsnight to share your insights.

  • “The Irish state has effectively guaranteed the Irish banks’ future losses (contingent debt) without having a clue as to what these losses will be”

    So has the Spanish state, no? Would you care to comment on the soon-promised audit of the trouble Spanish banks, whether that process will be thorough and accurate, and why the bailout deal was not deferred until the audit was published?

  • I really do not understand why the German/EU élite does this.
    You cannot even explain it by capitalist class interests, as this process of disintegration is (very likely to be) suicidal even from the point of view of German business. Insane.

    • The other option is to turn the German population into slaves who have to wok 50% of their time for the PIFGIBS. How long can you do that before you have a revolt?

    • If you find the answer please inform me. Seriously that is the biggest question. Do we miss something from the story?

    • @No EU dictatorship
      I’m not sure what you mean.
      Realistically, the other option would be a banking and fiscal union, eurobonds and coordinated, Europe-wide fiscal expansion in the form of some investment programme. The result would be the rapid end of the debt crisis, a fall in deficits and debt, higher employment and growth both in Germany and the Southern countries. Sounds scary, right?
      Of course one can entertain the (quasi-conspiracy) theory that German (etc.) capitalists want to bankrupt the rest of Europe to buy up assets for a song during the ensuing debt deflationary period. But that is a crazy scenario as it would hammer German exporters as well and in general the consequences would be devastating within Germany as well – at least for the short term. So I don’t buy this crackpot theory for my part.
      Actually, I don’t think there’s a grand plan in the background. Now _that’s_ real scary.

    • Why should everyone in Germany (governments, companies, banks, homeowners, consumers) have higher financing costs just that the South can benefit from their credibiity?

      Why should anyone in Germany guarantee debts of governments they cannot throw out of office?

      The ClubMed had de facto EuroBonds for 10 years. The result is well known. Now is pay day!

    • That’s not real, Pedro. The arrangement has favored Germany the most all this time (because the euro has been way too strong since 2003, what was negative for all but Germany). Also there are a lot of nuances like:

      1. While Greece and Italy have excess debts, so do to a lesser extent Germany and France, while Spain does not (for example). Spain’s problem is huge unemployment, a housing bubble and a weakened and somewhat rotten banking system… but not debt. Spain owes nothing to Germany or anyone.

      2. Spain’s problem is a problem of the banks, fuelled by privatization policies imposed by EU and a deranged housing bubble in tune with that of the USA or Britain, together maybe (we do not know because EU imposes everything but transparency) with a degree of corruption in the banking system.

      In brief Spain’s problem is most similar to that of Ireland, and therefore to that of Iceland. Spain should let the banks have a controlled collapse and should not acquire debt, as it is doing right now (with all the blessings and no formal conditions from Germany), to save them. Exactly as happened with Ireland, but x10 in scale, Spain is being given red carpet to save the banks so the whole European financial system does not collapse.

      Who pays? The Spanish citizens, who are seeing their salaries, working conditions and social services demolished with no good reason but the destructive mantra of “austerity”, and on top of all that, poisoned with the debt of the banks. As in Ireland, the European financial system has been provisionally bailed out at the expense of the citizens.

      What should be done: let the banks collapse.

    • Banks collapse! Yes please!

      Not only the Spanish pay. The people of Europe pay! The Spaniards have no job, the Germans do not make enough money (by getting paid in a soft currency) and our children will suffer from this mess by not getting good education (all money funneled to the banks via ClubMed).

      The only ones that profit are rich Greeks, buying cheaper imports, banks & bankers, EU employees, German exporters (owners), Greek politicians (by being paid in EUR vs Drachme),

      The EUR must go and free markets must do away with this inefficient allocation of capital! Europe will fall behnd even more if we continue to allocate precious capital to things that never would be able to attract private capital.

    • “The only ones that profit are rich Greeks, buying cheaper imports, banks & bankers, EU employees, German exporters (owners), Greek politicians (by being paid in EUR vs Drachme),”

      The very same German exporters that are the reason you are so proud of your trade surplus,that was only made possible by putting 16 more countries under the same currency.Do i smell double standards again?

  • We keep on underestimating the opponents…The world’s highest 1% IQs are now some tens of millions…they surely have among them the top 0.1% which is still several millions.And if you want to limit this to the 0.001% which is much higher than people we will ever meet (I talk about myself) they suffice to run their plan effectively.They are not idiots.They count on us having fewer of their kind among us.

  • Your cobweb diagram from your 2011/08/04 post (Why Italy? Why Spain?…) seems very valuable! (I just saw it now for the first time…) Perhaps the EFSF system was designed precisely to transfer as much of European GDP as possible to an international financial sector? Isn’t this what a revealed preference analysis would suggest? For sure that diagram should have gotten and should get more attention!

  • Question.

    Please correct me if I’m wrong, but a central banking authority as you describe it will have unprecedented political power. Power over the Eurozone, over the EU by extension, basically over the citizens of an entire continent.

    How do you propose to make it accountable to these citizens? As it is now, the supposedly democratic institutions of the EU are pathetic in that regard, even when they work. And during these last three years, they don’t.

    The directly elected European Parliament decides for absolutely nothing of importance. The European Council bows to the head of state of whatever country happens to be more powerful. The Commission is a bunch of technocrats that aren’t even supposed to be accountable to the people. Only to the vision of an integrated Europe (determined years ago and never since challenged), where the freedom of market and capital supersedes the freedoms and well-being of those living in the damn place. Same goes for the ECB as it is now.

    So let’s say we unify the banking system and create the institutions to oversee it. These institutions will have the power to solve the current crisis and prevent the next one in a manner beneficial to the people of Europe ONLY IF THEY WANT TO. But do they? Has that ever been in their agenda? Can anyone force them to make it a priority?

    Who are these bankers who will work against the banks for the sake of the people? Who are these experts who aren’t going through the revolving doors of “ridiculously well-paid job in the board of prominent financial institutions” and “position in a European commission will ridiculous power to serve said institutions”? Who will appoint them and who will have the authority to fire them if they screw up?

    …In short, how will that work, exactly?

    • @bloody amateur:

      I fully agree with you!

      It is finally time to say NO to this teutonic Euro-Beast!

    • It cant work. The only thing that keeps a business in check is its customers. If customers are compelled to buy no matter what you end up in a communist state and we know how that ended up.

      If you are compelled to buy from a private institution then that if fascism and I think we all agree that is bad.

      Basically Yiannis, and I think he is excellent, I think is proposing moving accountability of the monetary system away from the people who actually make it work, ie the people. How can this be a good thing? Honestly, I think Yianni is too close to the issue to see the fundamentals.

      And point 2 about capital injections, this money comes from the taxpayer or depositor. If the shares Yianni are talking about were worth anything there is no way the banks would allow the serfs anywhere near them.

  • What Merkel wants and what Yanis wants it looks to me it is the same thing. Sure the Germans want to be begged, but really they want a centralized European bank which really will be the Bundesbank controlled by Germans. We will lose control of our sovereignty and totally controlled by Germany and international corporations. Many Greeks including Yanis support it because erroneously think that this will break the relationship which exists between politicians, business and the intellectual whores.
    Wanting others to do what really is a Greek problem is equivalent to willingly allowing occupation of others and calling it a solution. Having common bonds maybe will alleviate a little be our debts but it will not solve our problem.

    • @Demetri:

      “What Merkel wants and what Yanis wants it looks to me it is the same thing. Sure the Germans want to be begged, but really they want a centralized European bank which really will be the Bundesbank controlled by Germans. ”

      I couldn’t agree more with you!

      It is finally time for the Greeks to say NO to this teutonic Euro-Beast!

    • Demetre, this is the supreme irony of the Greece. On the one hand you have most Greeks saying they want their government to be bailed out by Germany ie the Greek government needs bailout cash from Germany. And at the same time you have people saying Germany wants to take over the country which is apparently a bad thing. So, which is it? Do Greeks want the money or not? If I was giving my money to an alcoholic ie the Greek government I would want to know he or she is not going to spend the money on more booze. I think that is reasonable. Germans are being reasonable.

      It is the Greek politicians who are starving the country by buying booze with the bailout cash instead of spending it on food.

      The Greek government then blames Germany for not giving enough money for booze and food, when they should have only bought food with the money and cut the booze.

      It is text book behaviour of an alcoloholic/drug addict. The only way to rehabilitate is cold turkey.

    • @Richard:

      “On the one hand you have most Greeks saying they want their government to be bailed out by Germany ie the Greek government needs bailout cash from Germany”

      Mr. Richard as most of your misinformed Teutonic compatriots (I am not blaming you at all since I know that you simply can’t intellectually comprehend the truth) you confuse bailing out European banks (German and French primarily) with bailing out the Greek state.

      Your cookie monster Merkel with the help of her French “Bozo the Clown” Sarkozy has just bailed out your own banks and stabilized the banking system of the Eurozone so to speak.

      “And at the same time you have people saying Germany wants to take over the country which is apparently a bad thing. So, which is it?”

      As I said above I don’t blame you at all. You are obviously more proficient in stereotypical reasoning than in complex critical thinking!

      Let me try to put it right for you my teutonic Eurofriend 🙂

      The Troika has demanded that Greece privatizes all its assets in order to pay off the humongous new debts which they dumbed on Greece!

      Can you see now why the Greeks think that Germany wants to take over the country?

      “Do Greeks want the money or not? If I was giving my money to an alcoholic ie the Greek government I would want to know he or she is not going to spend the money on more booze. I think that is reasonable. Germans are being reasonable.”

      Yes my German friend you are reasonable and you show it all the time how reasonable you are 🙂

      Calling the whole Greek government an alcoholic is obviously reasonable, isn’t it?
      It is just like calling all Jews “Untermenschen” and parasites that was also very reasonable for your predecessors! Does it ring a bell with you?

      “It is the Greek politicians who are starving the country by buying booze with the bailout cash instead of spending it on food. The Greek government then blames Germany for not giving enough money for booze and food, when they should have only bought food with the money and cut the booze.”

      Again you are so reasonable that I honestly ask myself where the rest of the world would be without all your German “reason”???
      It is very difficult for me to argue against such strong arguments but I will try:
      Buy yourself one more bottle of booze my booze buddy 🙂

      “t is text book behaviour of an alcoloholic/drug addict. The only way to rehabilitate is cold turkey.”

      You seem to be an expert in this, did you undergo such an exercise already a few times so that you can tell us about your experience?

    • “…it will not solve our problem.”

      I am convinced you have no idea what “your” problem is.

    • A country can be 100% sovereign, but as long as the the Bundesbank (or any other form of currency competition) exists, it will always be limited in its madness to print money by the example that shows that there is a better way!

      The French were humilated so many times when they had to dvalue their crappy Franc. It was a joy to watch!

    • @No EU dictatorship:

      “A country can be 100% sovereign, but as long as the the Bundesbank (or any other form of currency competition) exists, it will always be limited in its madness to print money by the example that shows that there is a better way! The French were humilated so many times when they had to dvalue their crappy Franc. It was a joy to watch!”

      You know what? This would be also a humongous joy to watch for the rest of us:

      ” Europe’s democracies can stop this destructive course before it is too late. They do not have to subcontract their destiny to the Bundesbank. The broad Latin bloc commands the majority votes to compel the ECB to act as lender of last resort and reverse monetary contraction. They should use that power.

      If such a confrontation causes Germany and its satellites to storm out of EMU in a huff, that too is a solution of sorts. Monetary asphyxiation would end. The Latin euro would weaken to equilibrium levels. Capital would flow back into southern Europe once the boil had been lanced.

      Just do it. Call the German bluff. One bound and you are free. ”

    • I can’t but agree but with two caveats:

      1. There is no Latin bloc and looks like it won’t be around before it is too late…


      2. It is already too late. Devaluing the euro was a preventive measure to take since c. 2005 and certainly 2007 but now… most of the damage has already been done. It’s five to ten years late!

    • “Capital would flow back into southern Europe once the boil had been lanced”

      Correct. But there would be no more flow of German savings to the South like in the beginning of the EUR decade. These would stay at home. This way we solve 2 problems. No more deficit in the South and stronger domestic demand in the North!

    • Aristoteles:

      “Calling the whole Greek government an alcoholic is obviously reasonable, isn’t it?”

      If Greek government spending as a percentage of GDP exceeds tax collection as a percentage of GDP by 50%, and the balance is made up by foreign loans, then yes, yes it is reasonable.

      The Eurozone did lock northern and southern Europe into a currency union that southern Europe, especially, wasn’t ready for. Greece’s political elites, however, backed by the Greek electorate, made over the course of a decade the choice again and again to take advantage of German interest rates with the shocking result that we now see.

    • No idea what you’re talking about, Randy. The only one clearly benefiting from the eruo so far has been Germany, which gets cheap imports (from outside the Eurozone largely) and expensive exports in those southern Eurozone countries that you so easily criticize.

      Sure possibly 90% of the Eurozone was not ready to adopt the Deutsche Mark (which the euro is by another name) as currency and will never be. Specially it was not ready to see the dollar (the international reference of this age) plumetting and the euro rocketing instead. The euro would have performed much better overall would it have been a French franc and not a Deutsche Mark but Berlin had to impose their so-extremely-wrong conditions and this is the result.

      It is not Germans who are paying for it yet, mind you. The people dumped in beenfit-less unemployment en masse are Greeks, Spaniards and others.

      Incidentally Greece and Italy may have been overspending but Ireland and Spain have been instead underspending, tightly adhering to the EU conditions for more than a decade, while Germany and France went on partying almost like Greece (but, wait, they are rich and powerful and have nukes, eau de lancôme and aspirins-TM, that excuses it all).

    • McDonald, you are moralizing, you make incorrect generalizations and worst of all you imply that the Greek people are responsible for this mess!

      Your kind of “way of thinking” or better I should say “way of not thinking” has been also called Sado-Monetarism by Paul Krugman and others!!!

      Get serious or otherwise go and play some video games instead of wasting my time!

    • maju, you make an interesting point. Germany did benefit by the boost to the Greek consumer. But the Greek consumer is not the one being bailed out and inflicting cost on other taxpayers in Europe. Only the Greek government has the problem and it is dragging Greeks and Euro taxpayers down with it.

    • @ Maju: “The only one clearly benefiting from the eruo so far has been Germany, which gets cheap imports (from outside the Eurozone largely)”

      This is incorrect. Imports became cheaper and cheaper during times of the Deutsche Mark. Currency appreciation ring a bell?

      “Sure possibly 90% of the Eurozone was not ready to adopt the Deutsche Mark (which the euro is by another name)”

      But this was exactly what was promised to everyone! Independent ECB with the Bundesbank as a role model, low inflation, etc.

    • @Pedro: I’m not concerned about what Germany’s monetary system did before the EMU and specially the euro (which is EMU with a vengeance) was established. The EMU worked relatively fine (with some exceptions: Britain and Italy had to suspend it on occasion if my memory is correct) because it was time of fat cows. So did the euro… but this situation should have been predicted.

      Whatever the case, since the EMU was established in the late 1980s or early 1990s, the common monetary policy is not a “private” matter of the interests of Germany but that of the interests of all EU (or Eurozone at least). The fact that the system is designed in the German model and with effective German control means that it does not work well for the majority of countries: all Latin Europe has experienced major collapses of their industry even before the crisis set on, tied with increased unemployment, etc. When the crisis set on and the euro remained an “importing” (too strong) currency instead of becoming more of an “exporter” (weaker) one, the collapse of EU was guaranteed to happen.

      Greece is just the weakest link, so the first one to be affected but the problem is one of all the Eurozone because Germany cannot expect that homeless unemployed workers in Latin Europe buy their volkswagens anymore. Even the Netherlands is also being affected now, with a crisis (GDP collapse) that is right now more pronounced than that of Spain. Only Germany and a few small Eastern European states (some not even Eurozone members) are still growing above 1%.

      The strong euro is destroying the European economy, and with it the European Union and the European societies. However devaluing it now is already almost a decade too late.

      “low inflation”…

      We have persistent deflation now. Happy everyone?

    • Maju, you’re saying that Greece had no control over its public spending at all in the Eurozone, notwithstanding the monetary union’s creation without any kind of fiscal union?

      Germans didn’t force the Greek government to take out huge loans. The Greek government, of its own will and backed by the electorate, chose fiscal policies which prioritized loans over tax collection, with the results that we’ve seen.

    • “… you’re saying that Greece had no control over its public spending at all”…

      I did not say that. In fact I did not say much about Greece in that comment above, Randy but about Greece I said:

      “Incidentally Greece and Italy may have been overspending”…

      But now that you raise the matter of Greek overspending under a quite corrupt conservative government of the New Democracy party that now appears as the Eurogroup’s saviour, quite ironically, overspending stimulated by the Goldman Sachs corporation, whose men are now being placed in key positions in Greece, Italy and the ECB. Now that you mention that, I am still waiting for the managers who committed these so horrendous crimes against the Greek People first of all to be put on trial and in prison, maybe even death penalty as they have brought desperation and death to so many people…

      Why are the Greek workers who pay their taxes, have essentially no welfare and work much much harder (many more hours at least) than Germans or Dutch workers being held responsible and even guilty for that mismanagement which counted with the implicit collaboration of EU? Why they instead of the politicians and businesspeople who committed the abuses of trust and fuelled them with their complicity. Why are not the ND leaders or the Greek and New York banksters being held responsible with their lives and properties for all those abuses?

      Qui bono? Goldman Sachs! Why are they still at large?

      Now that you mention…

      … the Greek People has the right to bankruptcy, just like you or me. But the criminal managers have no right to get away.

    • I assume you mean the ERM with “EMU”.

      Under the ERM the Bundesbank did what it think was right. When politicians flew in with a helicopter from Bonn and wanted actions in order to make voters happy the Bundesbank told them to XXXX you and sent them back home.

      Anyways, everyone was told before the EUR was introduced that the ECB would be independent the Bundesbank and the EURO stronger than the German Mark. Mario Draghi the CDO (chief dove officer) of the ECB still repeats this, even though it is a lie.

      So everybody knew what they were signing up to and now they want to execute the opposite?

    • “Anyways, everyone was told before the EUR was introduced that the ECB would be independent the Bundesbank and the EURO stronger than the German Mark. Mario Draghi the CDO (chief dove officer) of the ECB still repeats this, even though it is a lie.”

      Well i’ll be damned….

      Everybody could already tell that you are (macro)economically iliterate…but now this????
      Well guess what,if you believed even for one minute that the euro could be stronger than the DM,im sorry but you literally got fooled..
      You’re not gonna find even ONE reason,why would the German elite push for a stronger currency than the DM.Let me guess…so that they could sell even less…

    • That was in a time of fat cows and also before the dollar was dumped so miserably to offset their massive debt and try to rally a tumbling economy. Once the dollar begins to collapse, the euro, like the yuan, must follow closely or be damned. We did not follow so we god damned – literally.

      That’s because if we are to export we cannot have the strongest currency on Earth year after year: it’s suicidal. We have become a market that does not export (or exports much less than it used to), what has devastated the economy of Europe (not just this or that country but nearly all), destroying the productive fabric, the social fabric and, as final result the euro and EU itself most likely.

      I think that if EU would have got some pan-European (or even Latin European) statesmanship in 2007 (or earlier), they would have devalued the euro in a controlled form to keep at relative parity with the plummeting dollar. That should have prevented much of this crisis.

      If Germany does not like it, they can always walk out (no harsh feelings).

      But now it’s probably too late and EU will implode no matter what.

  • I don’t think Ireland was running a tight ship at all quite the opposite. Their debt to GDP was close to what was agreed under the Stability and Growth Pace i.e. 60% and they were running budget surpluses but scratch underneath the surface and you will see that they increased the number of public workers by 60,000 that they entered into Ponzi style “benchmarking’ agreements with the Social Partners to increase salaries to crazy levels. The government and unions were in each others loving embrace, failing to realise that the money flooding the exchequer was from the property boom where the government received 40% – 42% of the cost of all “bubble properties”. The state was awash with this cash and it failed to regulate mortgage products and worse allowed developers to act like they were demigods. Example, It took 222 years for Bank of Ireland (BoI’s) loan book to reach 100bn which it did in 2004 yet 4 years later it had doubled to 200bn. Ireland’s economy was not prudently run there was group think, there was crony capitalism, it was endemic (still is) and the Irish Central Bank and Financial Regulator (put out to pasture on huge pensions) were extraordinary complacent some would say criminally negligent in their duties. Malfeasance is where public officials tasked with performing certain functions and duties fail to carry out these duties. The secretary general of the Department of Finance was rewarded with a promotion after it was discovered that his department had made an error in overstating national debt by 3.7bn Euro. He was packed off to the European court of Auditors and when his appointment was opposed there and voted down the government rammed it through at the Commission Level.

    Ireland’s response to the crisis has been grossly dishonest and it would be fair to characterise it as an apartheid type response. The government and public sector set up the Croke Park agreement in March/April 2010. This agreement said there would not be a single forced redundancy in the public sector, salaries would not be cut only for the lesser mortals who were not permanent and who were on contracts. Pensions would be protected and the agreement was to last 4 years. Within 7 months of this disgraceful and cowardly agreement the government was in a Bailout program. The agreement contained a clause that said if there was any deterioration or unexpected hit to the countries finances the agreement could be revisited. The country was locked out of bond markets and could not finance itself and was forced into a disastrous MOU which was described by one journalist as a “surrender document” but still the agreement was preserved at all costs and one of those costs has been national sovereignty.

    The unions and government sat down and scratched each others backs! Where is the austerity being felt? By 150,000 unemployed construction workers by the retail sector and by the raft of businesses that had grown up around building and construction. Ireland’s unemployment rate is officially 14.8% but I believe it to be a lot higher for many reasons not least of which is that self employed unemployed are not allowed to sign for benefits. Where else has it been evidenced? In the renewal of emigration? In the lack of jobs and opportunities for graduates and in the private sector which depended on state contracts which have been pared to the bone.

    There has been little if any structural reforms in Ireland and Ireland’s elites are actually increasing their wealth under the current “austerity regime”. Ireland is a very misunderstood country economically which has sophisticated and slick PR machines maned by veteran economists who invariably proliferate the government line because they do not want their salaries to be benchmarked back down to the new reality.

    Spain’s banking black hole in it’s banking ‘system’ is going to be over 300bn and as the sovereign will still not be able to borrow for salaries and day to day running costs of the state this is not over by a long shot. This is just another bandage applied like most band aids it will soon fall off.

    I voted “No” recently to the Fiscal Compact because even though it was being sold to the electorate as a “Stability” Pact in reality our politicians were salivating at the prospect of drawing down another bailout from ESM as they care not a whit about the further dilution and impact this will have on ordinary Irish people. When the inevitable default comes it will not effect them as they will have their nests well feathered by then.

    • I think you’re right. Ultimately the productive members of society will have to pay every penny of that squandered and borrowed by the unproductive and the only way to separate the productive from unproductive is with markets….

  • I had the “pleasure” of watching Spain’s PM Live on BBC World answering the questions posed by the press.
    There, I learned that the bailout is not a bailout, the loan is not a loan, and the spanish deficit would stay untouched after adding 100bn to it.
    Hats of to this guy. Even the boldest sci-fi writer would not dare to travel that far from reality.

    Yani: As good as always. Thanks for keep trying. If not for anything else but for us who feel that the media “reality” is directly atacking our cognitive skills

    • At least ho got one out of three right. The spanish deficit will indeed remain untouched. It is the total Spanish Government debt that will increase by 100bn.

  • Yani,
    Reading this post reminds me, again, that you are willing to save the banks in order to restore stability and growth to the Euro Area. I’m starting to believe that maybe the banks need to be taken down – put into receivership, and a new start made to building a banking system that serves as a utility to sovereigns and thieir citizens.

    • Mrs. David. I agree with you, some banks should be taken down, but before that happens, it’s clients (like any of us, althoug not my case) should take their money to state banks.

      I’m Portuguese and in Portugal the two main guilty banks were BPN (Banco Português de Negócios) and BPP (Banco Privado Português), in 2008 the goverment at the time insured the bank clients that their deposits were insured by 25k euros (anything above that was the clients responsabilities), but i did nothing to really get the bank manager like Dias Loureiro (former minister of the current president, cavaco silva) among others. But the problem in Portugal wasn’t only the banks but also our bad politicians.
      So many in previous goverments ministers and deputies are now working for private companies that worked with their political areas.

      It’s to many lobbies and to much protection from PS, PSD and CDS goverments. That the only real solution is to arrest everyone that are register members of those parties.

      Adriano Rocha

      p.s. sorry for the bad english , as you can see is not my main language

  • The best article I have read so far on the Bankia scandal. The Spanish banking system is a black hole of impossible proportions, but beyond that I really appreciate that you realize that (1) the case is much more comparable to Ireland (and therefore also Iceland in negative) and (2) the Spanish real state prices have been hold up artificially by means of state intervention and oligopolistic practices (which is much of the problem).

  • This article is one of the best I have read on the Bankia scandal.

    It is right in comparing with Ireland rather than Greece (Italy compares to Greece, Spain to Ireland because most of the debt is originally private and is only now being nationalized: anti-socialism of making the loses social and keeping the profits private). While you don’t mention it, by virtue of being similar to Ireland it is also similar in reverse to Iceland, which rejected to bailout the banks beyond a cap (naturally).

    It is also right in pointing out that the housing prices have been kept artificially way too high and that this is a critical part of the problem: banks have LOTS of nominal capital they can’t realize because it is not worth what they claim it is.

    It is wrong in one thing however, but it is just a typo: Lorca is written in Spanish and English with a “c” and not a “k”.

  • The ECB, Angela Merkel and the rest of the non-elected, overpaid neoliberal cultist mandarins who believe they know everything and that democracy is overrated fail to see that their quack medicine is simply not working. So, they blame it on the people, using an old Darth Vader line: “I find your lack of faith disturbing”.

    See folks? It’s not the deadly quack medicine of the neoliberal witch doctors that kills Europe, it’s people’s lack of belief in its magical powers.

  • Dear Yiani
    I am afraid that thee is one piece of data missing; that of the exact extent of the Bank’s insolvency (and not only at national level). Even if the public is reimbursed with stock this could turn out to be worthless as it would most certainly be based on falce data. Can the bottom of the pit be measured?

  • Dear Yani, is the extent of the Bank’s insolvency known? Can the bottom of the pit be measured? It would be very interesting to calculate the speed of the deadly cycle that consumes all. Also with issue of stock this could turn out useless if it turns out (as I am afraid it does) the bailout is but a bandaid to cover a hemorrhaging artery.

  • Την επαναδιαπραγμάτευση του δικού της Μνημονίου ζητά τώρα ανοιχτά η Ιρλανδία μετά την απόφαση για ένα όπως χαρακτηρίστηκε «δάνειο» και όχι «πακέτο στήριξης» της Ισπανίας για να ανακεφαλαιοποιήσει τις τράπεζές της, σύμφωνα με τη γαλλική εφημερίδα Le Figaro.

    Το Δουβλίνο εκφράζει ανοιχτά την οργή του καθώς θεωρεί ότι η μεταχείριση έγινε με δυο μέτρα και δυο σταθμά. Έτσι η κυβέρνηση ετοιμάζεται να καταθέσει το σχετικό αίτημα σύμφωνα με πηγή που δεν κατονομάζεται.

    Το Eurogroup αποφάσισε να διασώσει το τραπεζικό σύστημα της Ισπανίας διαθέτοντας ποσό ύψους 100 δισ. ευρώ, χωρίς να ζητάει ωστόσο από τη Μαδρίτη τη λήψη επιπλέον δημοσιονομικά μέτρα. Το 2010 η Ιρλανδία έλαβε 85 δισ. ευρώ από την Ε.Ε. και το ΔΝΤ υπό τον όρο ότι θα εφάρμοζε «δρακόντεια μέτρα λιτότητας», όπως υπογραμμίζει η εφημερίδα, ενώ το επιτόκιο με το οποίο της είχαν δοθεί τα χρήματα άγγιζε το 5,8%.

  • “All that has happened is that proud nations like Ireland and Spain have now joined Greece and Portugal”

    Fine, then there are four proud nations together. Maybe they should start to issue eurobonds backed by these four proud nations (and convince France and Italy to join). Instead of waiting for Austria, Germany, Finland and Germany to join this circle of madness, called eurobonds, as well.

    As for the core issue of this blogpost: Spain (and Ireland, Greece, Portugal – hey, ALL eurozone nations) should finally start to dismantly their various zombie banks instead of pouring more and more oil into the fire named banking crisis. Because it will only end once and if the insolvent institutes are closed. And insolvent a lot of them are, not just illiquid. From German Landesbanken to Spanish Cajas and Banks of ireland – the system is rotten to the core anbd therefore the core must be cut out.

    • The prouder a nation the higher the likelyhood of stupid decision making. Exception: USA

  • Two (possibly dumb) ideas from a financially illiterate reader:

    1. Provide state/Continent protection for savings then declare the banks bankrupt, writing off personal debts like mortgaged family homes, freeing income to go back into the high street economy.

    2. In the longer term, insist that all high schools teach stuff about banking and finance so that all conscientious 16-year-olds know how money gets into circulation and have some familiarity with the debate about whether it needs to be backed by precious metals and they can explain to their grandparents what a credit default swap is. If democracy is to mean anything, then banking and finance must be something that educated voters have a basic understanding of. Then it might be possible to debate the question of whether finance should be organised along the lines of a casino or a public service.

  • Spain is not Uganda?

    Unemployment Uganda 4.5% Spain 24.4%

    GDP Growth Uganda +6.5% Spain -1.3%

    Debt/GDP Uganda 25% Spain 85%

    External Debt Uganda $3.5 bill. Spain $420 bill (including another $125 bill as of Saturday)

    • I guess that makes Spain, Uganda? Lets see…Unemployment Uganda 4.5% USA 8.2%

      GDP Growth Uganda +6.5% USA 1.9%

      Debt/GDP Uganda 25% USA 103%

      Germany has worse fundamendals than Uganda too…

      Seriously,about time you confess you have no idea what you are talking about…or else go live in Uganda…

      Its no wonder why the economy sucks if investors like you participate in it…

    • But the point made very clear how pride of the ClubMed countries is in no relation to achievement. They are proud like noone you have seen and all there is in terms of achievement is utter failure!

    • The point is that if the Clubmed should strive really hard for what you call achivements,Germany would never be “succesfull” as it is now while its own fundamentals are still worse than Uganda’s though its still succesfull.

      And just an fyi…achivements not always have to do with economic indicators….Let alone,when using them out of context.Or else one would have to wonder why dont yall have China as your role model,or why dont you move to Uganda since it is such a successfull nation…

    • but only with economic achievements you can enjoy a lifestyle like those with economic achievements. If you want to be a philosopher and even if you are excellent, you are more likely to ride on a donkey than drive a Bentley

    • I didnt notice they have more Bentlies in Uganda than in Germany…which falls behind Uganda in several economic indicators…..smh…..

    • So what? HAve you heard a German politician making fun of Uganda?

    • I saw you making fun of Spain comparing it to Uganda ie you dont admire Uganda either….But if the stats you posted are the reason for not admiring Spain then you might aswell stop admiring Gemany for they very same stats put Germany behind Uganda aswell….

      So you either admit economics is not your strength…or just admit you have double standards…i think the former is more legit….

  • Possible spelling mistake: Search for “fous”, replace with “four”.

  • It’s clear now that Draghi iintends to proceed with the plan for the ECB to rule Europe with total impunity. From this morning’s Eurointelligence blog:

    Euro committee plans real fiscal union
    According to Der Spiegel Mario Draghi, José Manuel Barroso, Herman Van Rompuy and Jean-Claude Juncker are working on a fully-fledged euro area fiscal union that would deny its members the right to take on new debt independently. According to the plan, a government can only dispose independently of the revenues it generates by itself. A government that would need more would have to put in an application with the euro finance ministers. If they agree they would issue Eurobonds in order to finance the additional debt. There would be joint and several liability but only for newly issued debt, not the debt that existed prior the introduction of the fiscal union. According to the plans the euro finance ministers would be chaired by a full time chairman who could eventually become the euro area finance minister. The ministers would be controlled by a new body in which national parliaments would be represented.

    As someone else noted, a “bundesbank” to run Europe, maybe; but more likely Goldman Sachs running Europe. If Draghi manages to implement his plan, the bankers’ coup will be complete.

    • Yes, it looks as if this is the compromise direction that Merkel et al, will take. It will be a setting in stone of neoliberal ideology within the EU, and people will be so relieved that there is a structural solution to the chaos going on now, that they will swallow it without debate.

      Insidious and thoroughly nasty.

    • “Yes, it looks as if this is the compromise direction that Merkel et al, will take. It will be a setting in stone of neoliberal ideology within the EU, and people will be so relieved that there is a structural solution to the chaos going on now, that they will swallow it without debate. Insidious and thoroughly nasty.”

      It even seems to me that the crisis was planned this way from the very beginning!
      Not just a simple coincidence but rather a vicious plan!
      And as always Germany right in the middle of it.

      Brave New World!

  • . . . national debts to the EFSF have no priority over other debts whereas debts to the ESM have priority (or super-seniority, IMF style). . . . Which means, of course, that private investors will be even more reluctant than now to lend Spain.

    . . . or Italy, for that matter. I wonder what private investors of Italian debt are thinking this morning — “Let’s scram before our bonds gets subordinated, too!”

  • The countries of the Eu require domestic and foreign projects, in order to bring them closer and into cooperation. Europe owes a moral and historic debt to Africa, in the sense of ending the crimes committed by our ancestors. That means raising the physical economic platform of Africa as a whole, as well as South America and other parts of Asia. At the end of a day, a bank produces nothing. It does not produce food, electricity, heat, medicine, books, machine tools et all. Without a EU federal government, the EU member states won’t survive as democratic regimes under the Euro dictatorship of austerity.


    Europe has lit the fuse on an economic and financial bomb. The rescue package for Spain cannot plausibly be contained to €100bn once it begins, given the subordination of private creditors and collapse of global confidence in the governing structure of monetary union.
    Italy must guarantee 22pc of the bail-out funds, even though it cannot raise money itself at a sustainable rate. You could hardly design a surer way to pull Italy into the fire.

    Citigroup warned over the weekend that Italy’s economy will shrink by 2.5pc this year and another 2pc next year as the fiscal squeeze starts in earnest, with grim implications for debt dynamics. Public debt will jump from 121pc of GDP to 137pc by 2014.

    “The situation could rapidly become critical, because the country is highly vulnerable if the sovereign debt crisis persists or intensifies. A significant further rise in yields would deepen and extend the recession and accelerate the rise in the debt/GDP ratio, triggering a worsening vicious circle. We expect that Italy will have to request help,” it said.

    The world is uncomfortably close to a 1931 moment. Italy’s public debt is the world’s third largest after the US and Japan at €1.9 trillion. There is no margin for political error.

    The EU machinery (EFSF/ESM) exists largely on paper, a €500bn declaration of intent. It had trouble raising trivial sums last year to fund Irish and Portuguese loan tranches — understandably so, since the fund is a transparent attempt to evade the imperative of Eurobonds and EMU debt pooling.

    • I agree in that the current “rescue mechanism” is making the situation for e.g. Italy more difficult in that by having to guarantee for Spanish debt, Italy itself gets pushed closer to the abyss.
      Not sure that is too clever.
      I very much hope that there are some negotiations going on in the background that will lead to a mechanism that does not take the pressure out to reform but on the other hand does not load more debt on countries like Italy by making them guarantee for countries that are in an even worse situation (if only just, as in the case of Spain).

  • Please keep up the good work. Your literary references sing. Recombining “Blood Wedding” with “Reverse Alchemy” suggests the last romantic waltz of Old Order Elites oblivious to “harsh reality” in “Evgeny Onegin” and “The Masque of the Red Death.” Can we see “NOBILITY and Analogous Traditional Elites in the Allocutions of Pius XII” dancing the Viennese bliss at another “inflection point” recalled in books? See: “A NERVOUS SPLENDOR: VIENNA 1888/1889” by Frederic Morton; “THE END OF ORDER: VERSAILLES 1919” by Charles L. Mee, Jr.; “THE FALL OF THE DYNASTIES: The Collapse of the Old Order, 1905-1922” by Edmond Taylor. We witness again the power of “positive feedback” to folly in the Great Unwind. This is “Reverse Alchemy” in deeding: the “logos” of cosmic equilibration at work, dealing death again to a corrupt ancient regime.

    • I almost forgot the “piece de resistance”–

      “1815-1915: FROM THE CONGRESS OF VIENNA TO THE WAR OF 1914” by Ch. Seignobos: Professor in the University of Paris; translated by P.E. Matheson (Librairie Armand Colin, Boulevard Saint-Michel, PARIS, 1915) — a brochure from the set: “STUDIES AND DOCUMENTS ON THE WAR: Publishing Committee; Secretary: M. Emile Durkheim, Avenue d’Orleans, PARIS.

  • Making Banks Boring

    Bloomberg has an editorial arguing that making banks boring won’t prevent a crisis; only increasing bank capital will do so.

    To the extent that its big point is that banks will suffer during an economic downturn and the only protection against that is more capital (or insurance, including from the government), it’s hard to disagree.

    But what this editorial misses is that 2008 wasn’t just some periodic economic downturn that occured for reasons beyond our comprehension or control, like El Niño and La Niña weather patterns.

    Instead, the 2008 financial crisis was made by the banks themselves.

    The 2008 financial crisis was the inevitable result of the financial services’ industry’s behavior in the 2000s. And that’s why we have to make banking boring. Boring banks might be hurt by economic crises, but they don’t make them. We cannot prevent every economic downturn, but there’s no reason we should suffer the preventable ones.

    So how is boring banking a solution? It matters for two reasons, one widely understood, and the second entirely overlooked.

    First, boring banking does a reasonably good job of aligning risks and rewards for the parties actually making loans, and this helps control against asset price bubble. Boring banking, in its simplest, most stripped down form means that banks make loans and hold them on their balance sheets. (There are problems that can stem from this, namely from the asset-liability duration mismatch, but that’s another issue, and the other banking crises cited by Bloomberg didn’t pose systemic threats like 2008.)

    The primary reason that the banks ran into trouble in 2008 was not because they were making bad loans that they held on portfolio. Instead, they made bad loans because they knew those loans would be securitized. The problem was that the banks then went and bought into those very same securitizations, which they then used as collateral for their short-term borrowings (such as repo), making them intensely exposed to the performance of their MBS.

    The overprovision of underpriced credit enabled borrowers to bid up asset prices, which then meant that subsequent loans looked better than they were in terms of LTV. Once lax securitization practices ignited the bubble, it affected not only securitized loans, but also balance sheet loans. And then it was pretty much inevitable that someone would get spooked as evidence of poor loan performance speed in and a run and then a market-freezing panic would result that would hit all uninsured short-term credit as no one could be sure which institutions were impaired and which were money good. The fact that the banks were heavily leveraged didn’t help things, and Bloomberg is right that more capital would have softened the blow. But better to avoid the problems in the first place than to hope that capital will be sufficient.

    The second reason for making banking boring is one that is continually overlooked in the New Glass-Steagal debate, namely the political benefit of separating commercial from investment banking, which helps ensure against deregulation.

    Commercial and investment banks can both get into trouble when they’re not regulated. Indeed, the stories of the S&L crisis and of 2008 are fundamentally stories about deregulation. Glass-Steagal made commercial banking boring by divorcing it from securities. Glass-Steagal also split the financial services industry politically and enabled the different parts of the industry to be played against each other. Commercial banks, investment banks, and insurance companies fought each other for turf for decades. This mattered in terms of regulation because regulation is a political game.

    Because of Glass-Steagal, the financial services industry did not present a monolith in terms of lobbying, and a Congressman could afford to take a stand against one part of the industry because there would be campaign contributions forthcoming from the other parts of the industry. This is how William O. Douglas got the Trust Indenture Act of 1939 passed–he made concessions to the commercial banks in order to get their support for legislation that kept the investment banks out of the indenture trustee business. In the agencies, each part of the industry had its pet group of regulators who would push back against other regulators when they thought that there was an encroachment on their turf, which is the basic nature of deregulation—allowing greater activities than previously allowed. And it even mattered in the courts, as the insurance and investment banking industries financed major litigation challenges to commercial bank deregulation. The result of a politically fragmented financial services industry was to hold deregulation at bay for quite a while. This started to unwind in the 1980s and by the Gramm-Leach-Bliley Act, it was over. It didn’t take long before we all reaped the fruits of deregulation.

    If you want to see more modern examples of the benefits of divided industries, see the FDA’s recent decision on the naming of high fructose corn syrup. It’s going to keep going by that name, rather than by “corn sugar” because in part from intense lobbying pushback from another part of the sweetener industry–the cane and beet sugar manufacturers. Sarbanes-Oxley passed in part because of a split between the Business Roundtable and the US Chamber of Commerce. And in the financial institutions space, the Durbin Interchange Amendment passed because it posed banks against another heavy duty group, retailers.

    In short, yes, we need more capital and/or insurance as a cushion for banks during downturns. But we also need to make sure that the banks are not fueling the behavior that leads to economic crashes and downturns. That means in part ensuring that there is adequate regulation of the financial sector, and that requires breaking the political power of the banks. Glass-Steagal accomplishes a political breakup of the banks; neither the Volcker Rule nor capital requirements do. That’s why we need to make banking boring.

    • It reminds me of a Monty Python sketch, with the timid accountant who wants a new career. His dream, apparently, is to become a lion-tamer, Cleese persuades him to make a step in that direction via a banking job. (We ultimately learn that he has a serious misconception about which animal the word lion refers to!)

      These days, we might consider that lion-tamers have better managed their assessment of risk, in contrast with almost all bankers. The difference, of course, is that whereas a mistake by a lion-tamer could result in serious injury or death, bankers have ensured that their personal wealth and careers are not at all affected by serious injury to, or bankruptcy, of their banks. Analogously, it is as if the lion-tamer had potions for immortality and healing of wounds (kindly provided by European governments) and no fear of death or injury.

    • Great post, Foti.

      A poster here recently asked Yani why should banks be re-IPOed after they’re nationalized. It was an excellent question. Here is the address to an audio clip where Yves Smith discusses banks as a public utility:

      (btw, “Fotis” is my brother’s name, grandfather’s, and of at least half a dozen cousins.)

  • Richard, if the Greek government is spending the money on booze why the German government wants the drunken bastards back in power. Why they are afraid of change, any change? We have problems. We were mightily helped to have those problems. We are helped to have those problems for ever. The new way to colonize a country is not to send the troops; the new way is to offer to build a project that is maybe needed by few people at a price that is so high and usefulness so low for general public that the receiving population will be in debt for ever. This is not by chance. This is a strategy honed many years in Latin America. It is easy to buy the politicians and high government and army officials. They have needs, they have kids to send to school in some university that almost guaranties high income. Everybody is vulnerable. Almost every Greek farmer has a huge tractor. They bought it because they had to pay only 75% of the price. Who would resist? The problem is that they have usage only few hours a year. They just don’t have the land to use it. Somebody paid for those tractors to the manufacturers, to Germans, they made the money. Who paid for it?
    Is a book by Eduardo Galeano “Las venas abiertas de america latina”. It has nothing to do with Greece, but really is the same problem.

    • Dear Demetre I couldn’t agree more with you. Unfortunately I don’t believe like Yannis that Europe is idiotic. I believe politicians are very well aware of what they have to do and they are ommiting their duty for money and for power. Period. The real point, though, is what we can do to survive this situation. To this I don’t see much ink being spilt around here. Please, do show us some way out. Weknow about the hole only too well…..

    • Dear Demetre
      I am sure there are examples for cases that fit your theory that Greek debt consists of debt piled up because e.g. German businessmen talked them into buying a fancy bridge. Or tanks, U-boats or tractors.
      But on the other hand, it is natural for the manufacturers of such products to try and sell them to potential customers. Such as Greece. Greece was under no obligation to get as indebeted as it got. In principle, I am convinced, the majority of the debt mountain is due to a culture and practice in Greece to spend way more than what would have been supported by the Greek economy. The difference was bridged with loans. Part of them taken on by private consumers, part by companies.
      But the debt we are talking about in the first place is government debt. This was under full and exclusive control of the Greek government. If Greece took on too much debt, over years and years, and now is in a desparate situation, this is primarily the fault of the Greek government. And nobody elses. Certainly not the fault of German tractor manufacturers…

    • Demtre? Why do the Germans want the same drunk bastards back in power? For the same reason that ND, PASOK, Syriza are the most popular parties. Greeks still vote for the old ways.

      The Greek people are telling Germany who they have to deal. Germany has no say in it. Although if they had a better PR machine maybe they could influence things but I dont think they stand a chance. The international media is bought and paid for by the UK and USA.

      About Latin America. Yeah, they were/are getting shafted. So is Greece but if the Greek politicians followed Germany’s advice Greece could tell the banks to take a hike.

      Just to clarify what Germany is saying. The government must not spend more than 3% of what it takes in in taxes. Okay, so the answer is to cut government. End of conversation.

      They have tried increasing taxes and it has destroyed the country.

      So why is the Greek government imploding Greece? One, because like all countries, the politicians in Greece looking after the economy have no clue about economics.

      2. The major banks and the ECB do not want Greece working at 3% because they would simply take a massive hit in income. Governments would be borrowing massively less than they are now.

      3. – In short, they love power.

      The Euro currency really is a beautiful thing. If governments were to live by its conditions taxes would be lower, government debt would be less, government would have to be more responsible because they could not print their way out of trouble. The Euro could really be the ultimate device to make governments answerable to their people.

      About the tractors. Simply give them back to the bank and employ a contractor. Your asking for a perfect world which is impossible. Better to have an imperfect world and low taxes and government accountability rather that high taxes and no accountability, unfortunately we are heading for the latter.

  • I have to confess that increasingly, my motivation to opening Yanis’ newsletter is not only to read his wise words, (and they are wise, perhaps rather circumspect and diplomatic but still wise), but also to be wonderfully amused by the irritated flailing of Dean Plassaras against the world of inferior intellect as represented by some of the other contributors. It is an enjoyable comedy show. Keep it up. You make reading the comments great fun.

    • Harry,
      Dean has revealed himself to be a not-too-clever troll on this site. Other neo-liberal contributors on the site have been up-front about their right wing views. Not Dean, he pretends to be a man of the people. He’s not. He’s an ND troll. Comedy? Yes, I enjoy his convoluted consternation, too.

    • David:

      My job is to develop the best rationale for my country and its citizens.

      Your hobby is to be part of a tribe( a left tribe that is).

      Let’s not mix the 2 together. I have amble evidence in this blog from none other than yourself rendering your “troll” label unsupported.

      Just because you are losing your nerve it does not mean that the those opposing your positions are worthy of epithets. More likely it’s another tricky day for you:

  • Adding Insult to Injury

    Goldman Sachs eyes $2tln European bank firesale

    June 1, 2012

    US investment bank Goldman Sachs sees a silver lining in the troubles of Europe’s banks, which may need to sell more than $US2 trillion ($A2.07 trillion) in assets, a top Goldman executive says.

    European banks, pressed to bolster their capital cushions, are expected to dispose of $US607 billion in assets this year, the majority of them in soured debt, said Gary Cohn, president and chief operating officer of the prestigious Wall Street bank.

    They could divest another $US243 billion in assets in 2013, and $US147 billion the following year, Cohn said at a Sanford Bernstein strategy conference in New York on Thursday.

    According to Cohn, Europe’s total bank deleveraging could exceed $US2 trillion and Goldman Sachs is “well-positioned to intermediate these asset sales”.

    “We believe that Europe and the growth markets will present compelling opportunities for the firm,” he said.

    Cohn said the assets put up for sale were expected to be under-pressure debt securities backed by distressed assets.

    Asked about a potential breakup of the eurozone amid severe financial strains, Cohn recalled that Goldman Sachs had “dramatically reduced” its European exposure.

    He said the Wall Street giant had pored through its portfolio of assets “contract by contract and position by position” to understand the effect of any change in the currency.

    • A Classic Pump-And-Dump Scheme

      It is perhaps beyond the ability of an innocent public to believe this, but there is a growing body of evidence that a few mad scientists might have engineered the near-destruction of the American financial system. Except they weren’t scientists, per se – they were unscrupulous, market manipulating hedge fund managers, and we can almost hear them cackling with glee as they haul their ill-gotten billions to the bank.

      In a civil suit filed Friday, the Securities and Exchange Commission charged Goldman Sachs with fraud for helping hedge fund manager John Paulson create collateralized debt obligations that he had secretly designed to self destruct.

      That is, Goldman Sachs, at the direction of Paulson, hand-picked mortgages that were certain to go bad, and stuffed the mortgages (or rather, “synthetic” derivatives of the mortgages) into collateralized debt obligations that temporarily masked the true value of the loans.

      Goldman did this for only one reason: to create instruments against which Paulson and other hedge fund clients could bet with virtually no risk.

      Meanwhile, Goldman cheerfully sold the CDOs to unwitting customers, knowing full well that those customers would be wiped out when the reference loans inevitably defaulted. Goldman and its hedge fund clients also surely knew that the losses on these synthetic CDOs would crash the overall market for CDOs, hobble competing investment banks that had CDOs on their books, and do serious damage to the financial system.

      Goldman isn’t the only bank that created these CDOs: Deutsche Bank, UBS, and smaller outfits, such as Tricadia Inc., perpetrated similar scams.

      All told, well over $250 billion worth of these “synthetic” CDOs were sold into the market in the two years leading up to the financial crisis of 2008. Indeed, there is a distinct possibility that a majority of all the CDOs sold during those two years were deliberately designed to implode by hedge fund managers who were betting against both the CDOs and the financial system as a whole.

      For more than three years, the media has swallowed the hedge fund party line that our economic troubles were solely caused by mortgage companies lending too much money to undeserving home buyers. No doubt, there was over exuberance and fraud in the world of subprime lending, but that is not the full story.

      It is now clear that the so-called “real estate bubble” was fueled by an expanding market for CDOs. And the market for CDOs was driven, in turn, by fraudulent deals similar to the ones that Goldman did for Paulson. In short, we witnessed a classic pump-and-dump scheme, only this time it was writ large, on the scale of the U.S. financial system.

      I predict that as the details of this doomsday machine come to light, we will see that the hedge funds that profited from it all know each other well. I predict further that it will become apparent that what ties these hedge funds to each other is a common acquaintance with associates of Michael Milken, the famous financial criminal who pioneered the market for CDOs, and whose criminal debt machine nearly brought the economy to ruins in the 1980s.

      John Paulson, who launched his career with the assistance of a host of Milken cronies, including Jerome Kohlberg and Leon Levy, is one of the hedge fund managers in this network. He has been described as a genius by the media, and perhaps that is what he is, but we now know that he abides by the Milken code, which has it that there is virtue in a clever con well-orchestrated. And never in history has there been a more profitable con than Paulson’s: his bets against the CDO market – the market that he helped set up to collapse — earned him more than $3 billion over the course of just a few months in 2007.

      Another hedge fund in this network is Magnetar Capital, whose chairman and senior partner is Michael Gross, formerly a founding partner of Apollo Management, which is run by Milken’s closest crony Leon Black. Magnetar featured prominently in the Milken network’s attack on biotech company Dendreon.

      This hedge fund is currently under SEC investigation for helping to manufacture and sell doomsday CDOs that it was simultaneously betting against with credit default swaps. Reporter Yves Smith, who has been working on this story from day one, reckons that Magnetar’s bogus CDOs accounted, incredibly, for between 35% and 60% of the total demand for subprime mortgages in 2006.

      Given that the economy was being set up for a collapse by hedge funds in this network, it is not surprising that it was Milken-affiliated hedge fund managers who were most prominently and vigorously shorting Bear Stearns, Lehman Brothers and other big investment banks that were on the receiving end of the fraudulent CDOs.

      These hedge fund managers include Greenlight Capital’s David Einhorn (who launched his career with the former top partner of Milken crony Carl Icahn, and likely worked in cahoots with Milken to attack a company called Allied Capital); SAC Capital’s Steven Cohen (who was investigated by the SEC for trading on inside information provided by Milken’s shop at Drexel Burnham); and Third Point Capital’s Dan Loeb (who got his start dealing in Drexel Burnham paper alongside Milken’s former employees at Jeffries & Co.).

      It is also important to note that the pump-and-short CDO scam could not have happened without the help of American International Group’s financial products unit, which sold a lot of the credit default swaps that the hedge funds used to bet against the CDOs. That unit at AIG was run by Joseph Cassano, formerly one of Milken’s top lieutenants at Drexel Burnham. Did Cassano know that the CDOs were designed to implode? Perhaps not, but it is safe to assume that his relationships with the hedge funds creating the CDOs influenced his decision to insure them.

      It is also a matter of significant interest that Cassano was ordered to stop selling the credit default swaps in 2007, a sure sign that somebody at AIG saw that a cataclysm was imminent, but he did nothing to protect AIG from the massive losses that the cataclysm was sure to entail. When presented with evidence that the CDOs were rotten, Cassano held on to the CDS positions, rather than sell them off to people who, unlike AIG, would not have the resources to pay the hedge funds in the event of defaults.

      This is not to suggest that these people hatched some kind of dark conspiracy to destroy America. But it is to suggest that relationships matter a great deal in the world of finance, and there is one network of miscreants that has consistently shown itself willing to profit from crookery, financial destruction and the misery of others.

      One thing is certain: we will learn more about this scam in the weeks and months to come. And while news organizations like the New York Times should be commended for bringing bits and pieces of this story to light, their tepid prose fails to convey both the odoriferousness of the short sellers’ misdeeds and the magnitude of a scandal that helped bring the American financial system to its knees.

  • And Merkel as the Moon, she would be perfect. That terrible combination of self pity and murderous violence.
    If only it could be Lorca first “play”, the one about the doomed love between the cockroach and the butterfly. The audience revolted and shut it down.

    Your prose is intense Yanis, what are you trying to do, rescue economics from the tired and the useless?
    The workhouse is real brother but the Yorkshire school might be even better.
    Desperate ignorance shoved down the throats. along with the beatings and starvation.
    Where is our Nicholas Nickleby, with all his faults, to save our Smike?
    To give hope to all the boys and in the end to Nickolas himself.

    Im scared Yanis and as I write this I can’t help thinking about Harry Potter talking to Lupin in the Prisoner of Azkaban about the Dementors.
    Harry asks Lupin why he is so effected by them and Lupin tells Harry that there are true horrors in his past but that he is not weak.
    Harry says he’s scared and Lupin says you would be a fool not to be.
    Teach me how to fight them Harry says. And Lupin says yes.
    I guess thats the hope, that without, all of us will sink into despair.

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