The Great Unraveling

Yesterday the “risk premium” for ten-year Spanish bonds versus German bonds grew to 5.1%, the biggest difference since the euro was born.  The divide between Spain and Germany, and not just on bond rates, grows wider each day.

Solutions exist — euro-wide deposit insurance, like our FDIC, to stop bank runs; euro bonds as a parallel system to country-specific bonds that would offer lower interest rates, but also lower risk.  Merkel said they are studying euro bonds, but that’s like when we were small and our parents said, “We’ll see.”  “We’ll  see” always meant no.  Solutions delayed are simply solutions denied.

No one knows where or how this will end.  I think what we can predict is that economic events will overtake political leaders.

This is the moment before all hell breaks loose.  It’s frustrating to watch the moment slip away.  A controlled crisis is always better than an uncontrolled one.

 

Leaders in Europe Ceding Control by Their Inacton

If Europe’s leaders don’t set policy at the top soon, the street is going to take over, and panic and fear will dictate events, not elected officials.

Spain is experiencing a run on its banks (either moving money from weak banks to stronger ones or out of the country entirely) that is only going to gain more momentum, and Spain’s deposit insurance system is bankrupt.  There is still time for Europe to offer European-wide deposit insurance that would quell this run before it becomes a full-blown panic.  Of course, Germany doesn’t want to do this.

European leaders have to decide if they want to cut Greece loose, but try to save other countries like Spain.  That’s the first decision.  Are you going to try to save everyone, are you going to try to save everyone but Greece, or are you going to let the whole thing go to hell?

Europe could offer euro-zone deposit insurance to everybody in the euro zone or dump Greece and offer it to the remaining countries.

Europe could offer euro-zone bonds guaranteeing countries’ debt to everybody or dump Greece and offer them to the remaining countries.

But Europe’s leaders are in a state of paralysis, which in itself is a form of decision-making, an abdication of control and responsibility.

Greece has become an excuse for not addressing the problems of other weak periphery countries, like Spain and Italy.  But ignoring these problems doesn’t make them go away.  Not deciding becomes a decision.

We saw what happened in this country when events overtook our leaders in September 2008, and our entire financial system was brought to the brink of collapse.  We saw Treasury Secretary Henry Paulson go down on his knees, begging Nancy Pelosi to stay in bailout talks after the Republicans walked out.  For Paulson, the arrogant former head of Goldman Sachs and the quintessential Master of the Universe, to be brought to such a shocking state tells you how close we came to tipping over the edge, how close we came to another depression.

Europe is on its knees, and Angela Merkel is on her way out of the room.