David McWilliams: Growth and monetary apartheid is a Catch-22
Published 25/04/2012 | 17:00
Financially, Spain is like Ireland but it is much, much bigger. There is little doubt that Spain will need a massive bailout. The question is, who has the money to bail out Europe's fourth-largest economy, and when Spain topples what happens to Italy and what happens to the euro?
The European response to the fact that the market gave up on Spain and Italy last November was to unveil the largest "cash-for-trash" scheme Europe has ever seen. The ECB, which isn't allowed to buy government debt directly, lent close to €1 trillion to the banks and they in turn lent this on to the governments.
So we have bust banks lending to bust governments and we are calling it success. For a few months, as expectations of growth sprang eternal, bond yields fell because there was this gush of liquidity coming from the central bank. But many sceptical investors sold into this liquidity, using the "fake" demand driven by the ECB as an opportunity not to buy, but to sell.