Europe More Pain
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Spain wants Germany to rescue the
country’s banks, but that is not how the eurozone works. All banks in
the eurozone are governed by the countries they are headquartered in.
This means there is a patchwork of banking rules and regulations and differences in the perception of safety
depending on the bank’s country of origin.
A German bank branch in Greece is
governed by German law and backstopped by the German government. Greek
banks are governed by Greek laws and backed by the Greek government.
Since the Greek government is broke, their banks have very little backstop.
If their capital falls below
European Central Bank limits, the host government must restore their capital before the bank can access funds from
the ECB. Understanding this explains the simplicity of a bank run
occurring in Greece. The money may simply go across the street to a
Spain’s banks are under-capitalized
because of bad real estate loans from the real estate bubble busting.
Germany wants Spain to request a government bailout, which would allow the government to recapitalize the country’s
banks. Spain wants the European Commission to extend bailout funds
directly to Greek banks.
Bottom line, Spain does not want
more austerity that a bailout would require. Politicians do not want to
give up their freedom to meet voter’s demands for entitlements. The
standoff will continue until Spain’s borrowing costs reach the point of decision. Spanish ten-year bonds were quoted to yield 6.39% in the secondary market this
morning. Greece, Portugal and Ireland were forced to seek bailouts when
their interest rates on 10-year bonds went higher than 6.5%.
Germany is proposing tighter fiscal
integration of the eurozone. We will cover this more in days to
come. Reuters has a good background article. The debate is framed by a German official “The
fundamental question is relatively simple. Do our partners really
want more Europe, or do they just want more German money?”
If you enjoy train wrecks, this is
going to be fun to watch. It is hard not to feel sorry for the citizens
of Greece, Spain, Portugal and others. They bought the lies their
politicians were telling them until the money ran out. Guess who is on
the list of running out of money? France. Before it is over, Francois Hollande, the new socialist president of France, will
have to bow to the Germans if he wants their money.
Get out the
popcorn. While we enjoy any opportunity to watch the French
demonstrate how humble they are, I have this gnawing feeling there is something amiss. Could it be because the U.S. owes more as a percentage of GDP than
The market got more bad news this
morning shortly after open when the Commerce Department reported Factory Orders fell in April. This was the third negative reading in the last four months. Economists expected an increase of 0.2%.
March results were also revised downward.
Factory Orders is a minor economic
report but the market is looking in all the nooks and crannies for good news right now. The market ground its way down to 1266 on the S&P before catching enough
support from anxious buyers to reverse and move back higher after lunch.
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