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Monday, July 23, 2012

Markets Tank as Spain Declares Martial Law

      Ok, not quite martial law but close enough, in economic terms:

      "Spain's stock market regulators banned short-selling on all Spanish securities on Monday for three months and said it may extend the ban beyond October 23."

       "The ban, which will not apply to market makers, will apply to any operation on stocks or indexes, including cash operations, derivatives traded on platforms as well as OTC derivatives, the regulator said in a statement."

        "European shares extended their losses following the move by Spain, which raised fears that the region's sovereign debt and banking crisis may be worse than expected."


        As Spain goes, so goes Italy:

        "Earlier on Monday, Italy reintroduced a temporary ban on the short selling of financial stocks as a growing euro zone crisis buffeted markets and took a heavy toll on heavily indebted countries in southern Europe."
       "In a move aimed to discourage speculative trading on Italian financial institutions, Consob said the ban on banking and insurance stocks would be effective immediately and remain in place until July 27."

        The leading fear in the market today is that Spain will need a full bailout:

         "A number of regional governments in Spain are set to request central government aid, heightening fears that the country will require a full-scale bailout. Spanish bonds yields surged to their highest levels since the euro was created in 1999."
         "Euro zone finance ministers approved terms for a loan of up to 100 billion euros for Madrid to recapitalize its banks last week. "
         "Adding to woes, Spain's economy contracted in the second quarter.
Concerns over Greece also returned amid worries that the IMF may no longer provide financial aid to the debt-ridden nation, according to a report in Germany's Der Spiegel, sparking fears the country could run out of money as early as September. And Greece's Prime Minister Antonis Samaras warned that the country was facing a new “Great Depression.”


     Another major worry is precisely the lack of worry in Germany. Merkel claims to be totally sanguine if the Greeks leave the euro. As Krugman says:

      "Germany’s vice chancellor says that the prospect of a Greek euro exit has “lost its terror”. Meanwhile, Spiegel is reporting that the IMF has decided to pull the plug."

      "I find their lack of terror … disturbing."     

      "I’m not saying that Greece should be kept in the euro; ultimately, it’s hard to see how that can work. But if anyone in Europe is imagining that a Greek exit can be easily contained, they’re dreaming. Once a country, any country, has demonstrated that the euro isn’t necessarily forever, investors — and ordinary bank depositors — in other countries are bound to take note. I’d be shocked if Greek exit isn’t followed by large bank withdrawals all around the European periphery."

      "To contain this, the ECB would have to provide huge amounts of bank financing — and it would probably have to buy sovereign debt too, especially given the spiking yields on Spanish and Italian debt that are taking place as you read this. Are the Germans ready to see that?
My advice here is to be afraid, be very afraid."

     http://krugman.blogs.nytimes.com/2012/07/23/a-foolish-lack-of-terror/

     Great to know that Merkel's not worried. The trouble is as Krugman says, that once one country leaves the euro-even if Greece is seen as deadweight-the spell is broken. I don't see how Krugman's negative prediction doesn't come true in that case-of bank runs on the periphery.

     I so much want to write about good economic news. But there is just nothing to work with.

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