The never-ending crisis

It seems that ever since the collapse of the banking sector something remarkable happens every week. There is a feeling that those who are in charge don't really know what they are doing and the economic crisis continues to grow all over the world.

Buttonwood
Jul 24th 2012
The Economist

IN THE autumn of 2008, the banking sector collapsed with remarkable rapidity. It seemed that every weekend something remarkable happened, from the demise of Lehman Brothers, through the sale of Merrill Lynch to Bank of America, the rescue of AIG and so on. In contrast, the euro zone crisis has unfolded in slow motion so we all feel a bit battle-weary, like First World War soldiers; if we date the problem to the start of 2010, then we are two-and-a-half years in, somewhere between the Somme and Passchendaele. There is the same feeling that those in charge don't know what they are doing; that all this sacrifice is going to waste. To quote Churchill, Europe's leaders seem

decided only to be undecided, resolved to be irresolute, adamant for drift, solid for fluidity, all-powerful to be impotent

A year or two ago, the EU leaders seemed to be operating on the theory that, if Greece could just be propped up, Italy and Spain would have the time to address the problem. Instead, the problems have spread. As Capital Economics writes today

a bailout of the Spanish sovereign - which is looking more likely by the day - would significantly deplete the resources of the EFSF/ESM and leave little in the pot to provide further assistance to Portugal and Ireland and, much more crucially, to deal with serious problems in Italy. Investors appear to have cottoned on to this fact. Indeed, the yield on 10-year government bonds rose by more in Italy than in Spain on Tuesday.

Spain might need a package of €200 billion, Capital reckons, on top of the €100 billion needed for its banks. The markets are forcing the pace as the rise in Spanish bond yields shows.

It has been tempting, on many occasions, to feel that the end game must be in sight - say, around the time of the proposed Greek referendum or the second Greek election. The temptation is strong now with the Der Spiegel report that the IMF will no longer finance Greece. One possibility is that the Greek exit will act as the Lehman moment, causing such chaos in the markets that the Germans will be forced to rescue Spain, as Hank Paulson was forced to rescue AIG. Or the ECB will step in, promising to cap Spanish and Italian bond yields. The more cataclysmic alternative is that the authorities will fail to act; that the Germans will fear, as Moody's suggested yesterday, that footing the bill for the rest of the euro zone will strain their balance sheet too far. Equity markets are reacting badly at the moment, although not so badly that they are discounting the cataclysmic outcome. Indeed, they have enough to worry about, what with disappointing economic data and weak second quarter results. Perhaps it will take a really bad day - a 10% fall in the Dax not a 2% one - to force action, just as Congress was frightened into approving the Tarp in 2008 by the market collapse after its initial rejection.

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