"On paper, the Spanish package seemed impressive. Specified at up to 100 billion euros, it was notably larger than the range of estimates of the hole in Spanish banks (40 - 90 billion euros, with the IMF coming out on the low side)."
"It was agreed quickly on a Saturday. And, through its design, it sought to avoid some of the features that have turned the other three bailout countries into quasi-permanent wards of the European state (Greece, Ireland, and Portugal)."
"After an initial welcome, markets comprehensively dismissed the Spanish bank rescue as insufficient and poorly designed. Most worrisome of all, the yield and risk spreads on Spanish sovereign bonds ended Monday higher than before the announcement of yet another costly bank bailout."
http://www.cnbc.com/id/47775613
Particularly worrisome for the market is ambiguity about senior government debt:
"There are valid reasons for the market disappointment. The package did not rupture the increasingly problematic link between weak Spanish banks and deteriorating sovereign creditworthiness. Too many operational details remain unclear; others raised questions about the seniority of existing investors. And the unconfirmed reaction of Spanish banks, which reportedly sold some of their government bond holdings, added to the uncertainties."
"There are valid reasons for the market disappointment. The package did not rupture the increasingly problematic link between weak Spanish banks and deteriorating sovereign creditworthiness. Too many operational details remain unclear; others raised questions about the seniority of existing investors. And the unconfirmed reaction of Spanish banks, which reportedly sold some of their government bond holdings, added to the uncertainties."
"European policymakers should consider carefully the reaction of markets on Monday – and especially so for the leaders of the big four (France, Germany, Italy and Spain) who are scheduled to meet before the big summit at the end of the month. The time for partial policy reactions is past. Difficult decision need to be made now, and not just about individual countries but also about the composition and functioning of the euro zone as a whole. "
For all this El-Elrain does hold out hope:
"There is still time for policymakers to regain control. But not much."
This is echoed in Italy where the next fire will start if the market isn't calmed:
“There’s no doubt contagion will come to Italy,” Daniele Sottile, a managing partner at the financial advisers Vitale & Associati in Milan, said at the same conference, which was convened by the Council for the United States and Italy on an island near Venice. “It’s proof that the European mechanisms designed to stop the crisis are not working.”
Sergio Marchionne, the chief executive of both Fiat and Chrysler, was more blunt at the conference. “Somebody better do something before we get to the point of no return,” he said.
Indeed the more we watch the euro crisis unfold the more we appreciate that as questionable as the US response was to the subprime meltdown in 2008 it was one million percent better:
"There is a delicious moment in the HBO film “Too Big to Fail” when Christine Lagarde, then France’s minister of finance, calls Hank Paulson, the U.S. Treasury secretary. It’s September 2008, and Lehman Brothers has just imploded after the government refused to bail it out. Panic is in the air. "
“Hank,” she scolds him. “How could you let Lehman fail? What on earth were you thinking?” She pleads with him to save A.I.G., which appears to be the next domino poised to fall. “This is not just an American problem,” she concludes. (Note: I served as a consultant on the movie.)
Oh, the irony! Here we are, more than three-and-a-half years later, during which time the euro zone has repeatedly flirted with financial catastrophe. Lagarde now leads the International Monetary Fund, which exists, in large part, to help countries survive such catastrophes. Yet neither she nor anyone else in Europe has been willing or able to do more than use Band-Aids to stanch the bleeding."
Yet now we've come full circle:
"euro-zone meltdown, if it comes to that, would be devastating to the already battered economies of Europe, leading to widespread credit contraction, mass unemployment and depressed economies across the Continent. But it would undoubtedly take a toll on our economy as well — and it would be a huge blow to President Obama’s re-election prospects. To paraphrase Lagarde, this is not just a European problem."
"The American and European responses to their respective financial crises are studies in contrast. The Bush administration and the Federal Reserve took an “all-hands-on-deck” approach: not just saving A.I.G. and recapitalizing the banks, but buying billions of dollars worth of subprime mortgages that were poisoning the banking system, and guaranteeing virtually all bank debt. Say what you will about the moral hazard that comes with bailing out too-big-to-fail banks, the strategy worked. By announcing to the world that it would serve as the lender of last resort, the federal government prevented a banking collapse, and, quite possibly, a depression."
"In the euro zone, there is no lender of last resort. Germany, which has the money and the clout to play that role, refuses to. The European Central Bank is constrained by politics and its own narrow sense of mission. Just last week, it declined to lower interest rates — in no small part, said its president, Mario Draghi
Turns out there's a real good reason investors are not reassured by the Spailout:
"Throughout the euro crisis, the response of Europe’s political leaders has been tepid, reluctant and unconvincing. They are willing to kick the can — and no more. The decision over the weekend to lend Spain $125 billion to shore up its tottering banking system is typical. For one thing, it’s unlikely to be enough. For another, it will do very little to improve Spain’s underlying problems — including 25 percent unemployment, an economy in steep decline and a growing federal deficit that may require its own bailout. You wonder why people are already speculating that Italy will be next? Because there is no investor confidence that the problem has been solved. Why would there be? It hasn’t been."
The trouble is that there are 17 separate governments compared with one US government. It's sort of like the old confederate idea of the US under the articles of confederation. Of course nevertheless trying to achieve a meaningful United States of Europe would be a lot harder. Unlike the US states, there is no common language, history, culture and heritage to link them. For all Europeans to think of themselves as Europe first and Germans, Greeks, Italians, or French second is obviously a long way off. It's quite questionable that they ever could feel like that. But without that is there any way to garner the political will to do what's necessary? If not then the euro is fatally flawed and there is no hope. As has been said: "God help me. God help us all."
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