Saturday 24 March 2018

End justifies means in battle to save the eurozone

SPAIN is trying to call Gemany's bluff. Yesterday, the Spanish finance minister made a direct appeal to the rest of Europe to bail out Spanish banks or at least to put together a fund to recapitalise the Spanish banks. This is exactly what Germany didn't want but may have to ultimately accept. If it wants to keep the euro, Germany will have to pay through the nose for the pleasure. By opening up another front, the Spaniards have rammed home the point that Europe's problems are not about fiscal deficits as the Germans maintain, but about the consequences of hyper-borrowing and lending in the boom.

The banking crisis in Spain is not destroying wealth but merely reflecting the extent to which Spanish and European wealth has already been destroyed via too much borrowing and lending to stupid investments which have now gone sour.

This leaves Spain in the same bind as Ireland: the banks are facing mass defaults as the price of property keeps falling. Independent estimates suggest that Spanish house prices could fall by another 35pc if they mirror similar crashes from peak to trough in the sunbelt states of the US. This obviously has an impact on the extent to which the loans go bad. At the moment, Spanish banks have made provision for 2.5pc of loans going bad, yet we know from Irish experience that this can rise very quickly.

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