Finito?

[KrazyHorse]

Gross debt is hardly a good indicator of a country's fiscal prospects

[DanS]

Very interesting. Spain really levered up in the past two decades.

Edit: Also, the UK.

[DanS]

KH: Would seem like a very convenient thing to do to shift some of the leverage to the public sector (directly or indirectly), no? That appears to be happening in the US, for instance.

[Dauphin]

Gross debt is hardly a good indicator of a country's fiscal prospects

Net debt would of course be more relavent, but I don't have that information to hand. For Japan, they're assets are clearly very sizeable though.

[KrazyHorse]

It's called net international investment position

[C0ckney]

something from ireland

http://ww<br /> w.independent.ie/opi...n-2973716.html

David McWilliams: Leaving the euro may be our least extreme option
the exchange rate question will rarely be far from the headlines. #If we are to have a referendum -- which, according to the Finance Minister, will be a vote on whether we are in or out of the euro -- we should get our heads around what the exchange rate does, what having your own exchange rate allows you to do and why that might be a valuable alternative for Ireland.

At the moment, the central plank of Irish economic policy, backed by the IMF and the EU, is something called "internal devaluation" and the logic of it goes like this: Ireland is uncompetitive and needs to export its way out of the recession. As we don't have an exchange rate that can fall, we need to grind down wages over a period of years so that Irish industry can be competitive again.

At the same time as we are forcing down wages, we must also reduce government expenditure, because we can't afford to pay for it. As the government deficit at the start of the IMF bailout programme was 14pc of GNP and we need to get the deficit down to 3pc, we will reduce spending by 11pc of GNP over the next two or three years.

Therefore, government spending will be reduced dramatically. But if the government is not spending, who is?

We should be, but we are not because we are worried about the future, so we are saving. Who is spending the missing 11pc of our income which has just been taken out of the Irish economy? Now here is where our policy gets a bit hopeful to say the least because in order for our economy to stay just as it is, foreigners need to massively increase their buying of Irish goods.

But why would they do this? Have Irish goods become dramatically cheaper so that they have become dramatically better value?

The theory of "internal devaluation" says that the Irish economy and workforce are so flexible that we will all take dramatic paycuts, this will drive down wages and we will become competitive this way. Because we have no exchange rate and are members of the euro, we will devalue by canabalising our own wages -- but according to the present policy, even at these much lower wages we will be able to service the huge debts built up in the credit bubble. How is that possible? Well, it is not.

But before we explain why debt dynamics at lower wages makes servicing old debt impossible, let's examine the first bit of the theory which says that Irish wages have fallen dramatically and will continue to do so. Let us examine the evidence that Irish workers -- or any workers for that matter -- accept reductions in their wages as the theory says.

Look at the cartoon. It shows wages in Ireland, Iceland and Latvia. Ireland and Latvia are in the euro (well, Latvia has a fixed exchange rate with the euro). We are both locked in austerity programmes, and we are supposed to be devaluing internally. The other chart shows Icelandic wages measured in euro. Iceland has its own currency, the kroner.

What the chart in the cartoon reveals is that Irish and Latvian wages have remained more or less the same since 2008 against our competitors. In contrast, Icelandic wages against its competitors have fallen dramatically. Iceland has become dramatically more competitive vis-a-vis Ireland and Latvia because it devalued its currency dramatically in 2008/09.

Iceland in one sharp devaluation has achieved what Ireland and Latvia are supposed to achieve over years of grinding down wages. If we are supposed to achieve Icelandic levels of wage competitiveness, we will have to shrink the economy over the next few years. By having their own currency the Icelandics did in a few weeks what we have been trying -- unsucessfully -- to do over four years.

Having its own exchange rate allows a country to adjust quickly. Yes, living standards when measured in euro fall, but that has to happen in both the Irish and the Icelandic case. The question is how do you achieve this and are you giving your people a chance?

There is a reason why no economy in the world has ever emerged from a recession like ours without changing its exchange rate. The reason is that it simply can't be done. There is no evidence anywhere, ever, that shows that a country can operate a successful "internal devaluation" -- particularly an economy carrying as much debt as we have.

So if it can't be done, what are we trying to do? And more to the point, what is the cost of this lunacy? Look at the chart again. Much is made of the "flexibility" of the Irish labour force. But the flexibility is not in wages but in levels of unemployment. The Irish labour market adjusts alright, but the adjustment comes not in falling wages but in rising unemployment and emigration. This is what we don't want to happen, yet this is what the policy is leading to.

So those getting paid too much in Ireland still get paid too much, yet the people who feel the real cost of the "internal devaluation" are those who lose their jobs because rather than cut wages, employers cut staff.

When people are laid off, it is very difficult to get a new job because no one is spending in the economy. The government is not spending and the people are not spending. But what about the the much heralded export-led growth which postulates that foreigners will buy loads of Irish goods, more than compensating for the fall in domestic spending?

Well it doesn't happen, partly because Irish wages don't fall as we can see in the chart, so Irish goods are no more competitive than they were a few years ago. Yes, exports have risen, but nowhere near enough to offset the local contraction. This is why unemployment has trebled in three years and why emigration is running at over 1,000 people a week. It is not that the policy of internal devaluation is not working, it can't work. It has never worked anywhere, ever.

Yet the really strange thing is that it is billed as being mainstream economic thinking. It is not mainstream economics, it is highly radical. What is mainstream and proven is the power of devaluations. Yet those recommending the course of action that mainstream economics tells us to do are labelled radicals.

Language will be very important in a referendum year and you will notice that the Irish and European economic establishment will deploy language to paint those who support the country returning to its own currency as extreme. The truth is that what is extreme is following a policy which has never worked anywhere and the cost of which is mass unemployment and mass emigration. Now that is truly radical.

[pchang]

I hope that if they drop the Euro, they don't go back to the pound. I hope they pick something really Irish like the Shillelaghs or the Blarney.

[Elok]

Ideally they would go back to the historical cumal, which IIRC was the price of a female slave.

[BeBro]

Blarney? I like that

[DanS]

Italian and Spanish yields have crept back up again...

[Dauphin]

Hungary looks a problem too.

[pchang]

Hungary uses the Forint. Looks like the PM there is going to give the IMF the middle finger. That may be the best for the people.

[kittenOFchaos]

Britain is okay...we've got £35 billion to waste on a high-speed rail link to Birmingham.

[notyoueither]

http://www.economist.com/blogs/butto...ro-zone-crisis

Watch the Greeks, not the agencies
Jan 16th 2012, 13:55 by Buttonwood

WHILE the big headlines over the weekend were about S&P's downgrades of European countries, the more worrying news came from Greece, where talks on a debt deal broke up. While I am not as negative as some on the agencies (their record on rating sovereign debt is pretty good), the market had already anticipated a downgrade of France, which has been paying a higher rate on its debt than Germany.

Greece's debt is a complex issue. Clearly, it must default to get its debt-to-GDP ratio down. But it also has a competitiveness problem that requires either a devaluation (not possible within the euro) or a fall in its costs (lower wages and thus a lower standard of living). Some of the pain of the latter option can be cushioned by subsidies from its fellow EU nations but they demand reforms in return. Many of those reforms are opposed by Greeks; it remains to be seen whether the technocratic government can push them though.

Of course, Greece has already had loans from the rest of the EU and this complicates matters further. The authorities are unwilling to see take any write-downs on their money. That puts all the burden on the private sector. Indeed, the more money lent by official bodies, the greater the write-down the private sector is forced to absorb if the Greek debt-to-GDP ratio is to fall significantly.

Throw in another twist. The authorities are obsessed (rather perversely in my view) with making the agreement voluntary so that the Greek deal is not classed as a default in terms of credit default swap market. That gives the creditors a bit more bargaining power. The banks appear likely to go along with whatever they're offered but the hedge funds are putting up more of a stink.

Talks between Greece and its private sector creditors are due to resume on Wednesday, January 18. Whereas a tentative deal was reached in October to write the debt down by 50%, a lot depends on the interest rate on the new debt. The lower the rate, the better for Greece but the bigger the hit (in present value terms) to the creditors. And then there are the knock-on effects. The EU has said that the Greek deal won't set a precedent for other nations. But, pull the other one. The EU has said a lot of stuff during this crisis and has backtracked many times. The bigger the write-off for Greece and the more aid (in terms of cheap finance), the more other nations will be encouraged to default and the greater the worries of creditors of other nations. That's why the Greek deal (or lack of it) is so crucial.

[Dinner]

Why don't they just kick out the Greeks already and be done with it? Dragging this out for years probably won't result in a different outcome.

[Dinner]

Well, in some ways Greece is better than Italy. At least their cruise ships don't sink.

[Braindead]

Well, in some ways Greece is better than Italy. At least their cruise ships don't sink.

And the food. I would rather eat a yiros than a pizza.

[dannubis]

BLASPHEMY !!!

[Az]

Britain is okay...we've got £35 billion to waste on a high-speed rail link to Birmingham.

Network Rail is going to be my most successful account this year

[molly bloom]

Blarney? I like that

Unfortunately it will be made of stone and only usable if you are suspended upside down.

[notyoueither]

http://www.theglobeandmail.com/repor...rticle2337889/

Greece: The jig is just about up
Constantin Gurdgiev
Globe and Mail Blog
Posted on Wednesday, February 15, 2012 11:33AM EST


Constantin Gurdgiev is head of research with St. Columbanus IA and lecturer in finance at Trinity College, Dublin

So, the Greece Deal is done – at least mostly done – following riots and Parliamentary approval. What now?

Well, nothing.

First, Germany, the Netherlands and Finland - the only three still fully solvent economies of the euro area - will huff and puff through the next week or so, in the end approving the new deal. The final tally for this latest bailout, to be set by the euro group, will come in at €130-billion. Or, or it might come in at €145-billion to account for deterioration in the Greek economy from last July through December, 2011. It might even include few billion more to cover losses on continued recession, plus riots, since the New Year. Very close to the March deadline, Greece will receive the vital €14.5-billion in funds needed to repay its bondholders, thus averting or delaying the immediate threat of default.

The only big uncertain is the Finnish insistence on collateral for lending to Greece – the insistence on which can still ignite a race to seniority amongst other net lending countries contributing to the Bailout-2. But in the end, the Finns will be forced to accept a compromise.

Following the finalization of the deal, the Troika (the IMF will find it very difficult to resist the temptation to partake take EU money to finance lending to Greece as the new funds will only expand the IMF’s mandate) will promise to keep a hawkish eye on the dovish Greece. The bond yields across Europe will come down a bit more. ECB’s injection of some €600-billion worth of new money into the banks will help even further. Few European banks are in any position to lend into the real economy, so the LTRO-2 will go, once again, to prop up sovereign bonds prices.

The EU elites and national governments will proclaim that the rescue package was a sign of Europe’s ability to deal with the crisis, the evidence of viability of the euro and will move on to draft more daft high-sounding ineffective programs for the social-knowledge economy, driven by wind-powered nanotechnologies.

By mid-April, however, tired of ECB-sponsored margin arbitrage scheme, investors worldwide will take a look once again at the peripheral states’ fundamentals. By then, Q4 2011 – Q1 2012 recessions will be fully apparent. Rising unemployment and collapsing domestic economies will push deficits off targets and debt dynamics will show a renewed upward momentum, while political pressures on governments in Italy, Spain, Portugal and the perpetually ungoverned Belgium will become more pronounced. Spotting new shorting opportunities, the markets will be back at pressuring peripheral yields up.

Greece will remain the core driver of uncertainty and risks both in the short term and over the long run. Having satiated itself with the rescue funds for the moment, the Greek government will do what it does best – shirk from any substantive change. In April, a set of new reforms measures will be deployed, starting with tightening of some high profile (aka blatant) tax non-compliance. Woefully inadequate, these measures will be followed by deeper cuts percolating into the pay packets and employment numbers of public servants. Mild as these effects likely to be at the start, they will trigger new riots. A new block of disillusioned and recently expelled lawmakers will take a populist stand against the government.

Across the periphery, the extreme and populist leftist parties will gain prominence not because they represent a viable alternative to the status quo, but because after three years of continued crisis, no single mainstream party will be left unscarred by complicity with the EU/ECB/IMF policies.

By mid-May or early June, Greeks will post new data showing catastrophic contraction in growth, continued rises in unemployment and poor targets performance on the fiscal side. The crisis will be back. Greece will be hurtling toward elections.

The reality of the Greek situation is very simple, and extremely grave. The country will not deliver on the vast majority of its promises. Frankly speaking, it never did deliver anything real or sustainable in terms of growth and competitiveness in the past and it is not about to start doing this in the near future. The only uncertain part of this equation is just how long will it take the markets to realize that the Greek economic recovery arithmetic is simply bogus, computed not to reflect the reality of rising debt, falling tax revenues, collapsing economy and destabilized society, but to fit the Brussels-Frankfurt objective of pretending that debt to GDP ratio of 120 per cent is sustainable, lest admitting otherwise would trigger a run on Italy. My guess, about two-three months will do. Possibly six. Thereafter, the full-blown crisis will be back.

Are markets already factoring in what is being reported to be inevitable? Is a Greek default and exit (or expulsion) from the Euro inevitable?

[Dauphin]

Commercial contracts have. Firms are putting in terms about what happens should Greece withdraw (e.g what currency are debts, obligations, rents, etc). Whether they have legal value in a Greek or other court will be interesting to see....

[pchang]

When Greece defaults, they will instantly have a balanced budget.

[notyoueither]

Re Jon's thread.

A thread here:
http://worthwhile.typepad.com/worthw...-the-euro.html

Led to here:
http://baselinescenario.com/2012/05/...rvivors-guide/

The End Of The Euro: A Survivor’s Guide
Posted on May 28, 2012 by Simon Johnson | 73 Comments

By Peter Boone and Simon Johnson

In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. Economic chaos awaits them.

To understand why, first strip away your illusions. Europe’s crisis to date is a series of supposedly “decisive” turning points that each turned out to be just another step down a steep hill. Greece’s upcoming election on June 17 is another such moment. While the so-called “pro-bailout” forces may prevail in terms of parliamentary seats, some form of new currency will soon flood the streets of Athens. It is already nearly impossible to save Greek membership in the euro area: depositors flee banks, taxpayers delay tax payments, and companies postpone paying their suppliers – either because they can’t pay or because they expect soon to be able to pay in cheap drachma.

The troika of the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any new lending program would run into the same difficulties. In apparent frustration, the head of the IMF, Christine Lagarde, remarked last week, “As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time.”

Ms. Lagarde’s empathy is wearing thin and this is unfortunate – particularly as the Greek failure mostly demonstrates how wrong a single currency is for Europe. The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange “internal devaluations” (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level.

Faced with five years of recession, more than 20 percent unemployment, further cuts to come, and a stream of failed promises from politicians inside and outside the country, a political backlash seems only natural. With IMF leaders, EC officials, and financial journalists floating the idea of a “Greek exit” from the euro, who can now invest in or sign long-term contracts in Greece? Greece’s economy can only get worse.

Some European politicians are now telling us that an orderly exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves. They are wrong. Greece’s exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone.

During the next stage of the crisis, Europe’s electorate will be rudely awakened to the large financial risks which have been foisted upon them in failed attempts to keep the single currency alive. If Greece quits the euro later this year, its government will default on approximately 300 billion euros of external public debt, including roughly 187 billion euros owed to the IMF and European Financial Stability Facility (EFSF).

More importantly and currently less obvious to German taxpayers, Greece will likely default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro zone). This includes 110 billion euros provided automatically to Greece through the Target2 payments system – which handles settlements between central banks for countries using the euro. As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail. This role is taken on by other euro area central banks, which have quietly leant large funds, with the balances reported in the Target2 account. The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults.

The ECB has always vehemently denied that it has taken an excessive amount of risk despite its increasingly relaxed lending policies. But between Target2 and direct bond purchases alone, the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data). This amounts to over 200 percent of the (broadly defined) capital of the euro system. No responsible bank would claim these sums are minor risks to its capital or to taxpayers. These claims also amount to 43 percent of German Gross Domestic Product, which is now around 2.57 trillion euros. With Greece proving that all this financing is deeply risky, the euro system will appear far more fragile and dangerous to taxpayers and investors.

Jacek Rostowski, the Polish Finance Minister, recently warned that the calamity of a Greek default is likely to result in a flight from banks and sovereign debt across the periphery, and that – to avoid a greater calamity – all remaining member nations need to be provided with unlimited funding for at least 18 months. Mr. Rostowski expresses concern, however, that the ECB is not prepared to provide such a firewall, and no other entity has the capacity, legitimacy, or will to do so.

We agree: Once it dawns on people that the ECB already has a large amount of credit risk on its books, it seems very unlikely that the ECB would start providing limitless funds to all other governments that face pressure from the bond market. The Greek trajectory of austerity-backlash-default is likely to be repeated elsewhere – so why would the Germans want the ECB to double- or quadruple-down by suddenly ratcheting up loans to everyone else?

The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations – an on-again, off-again pattern of support — and that simply won’t be enough to stabilize the situation. Having seen the destruction of a Greek exit, and knowing that both the ECB and German taxpayers will not tolerate unlimited additional losses, investors and depositors will respond by fleeing banks in other peripheral countries and holding off on investment and spending.

Capital flight could last for months, leaving banks in the periphery short of liquidity and forcing them to contract credit – pushing their economies into deeper recessions and their voters towards anger. Even as the ECB refuses to provide large amounts of visible funding, the automatic mechanics of Europe’s payment system will mean the capital flight from Spain and Italy to German banks is transformed into larger and larger de facto loans by the Bundesbank to Banca d’Italia and Banco de Espana– essentially to the Italian and Spanish states. German taxpayers will begin to see through this scheme and become afraid of further losses.

The end of the euro system looks like this. The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.

Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns — and that those credits may not get repaid in full. The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates. Finally, German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable looming bill to bail out their euro partners.

The simplest solution will be for Germany itself to leave the euro, forcing other nations to scramble and follow suit. Germany’s guilt over past conflicts and a fear of losing the benefits from 60 years of European integration will no doubt postpone the inevitable. But here’s the problem with postponing the inevitable – when the dam finally breaks, the consequences will be that much more devastating since the debts will be larger and the antagonism will be more intense.

A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008. In fall 2008 the decision was whether or how governments should provide a back-stop to big banks and the creditors to those banks. Now some European governments face insolvency themselves. The European economy accounts for almost 1/3 of world GDP. Total euro sovereign debt outstanding comprises about $11 trillion, of which at least $4 trillion must be regarded as a near term risk for restructuring.

Europe’s rich capital markets and banking system, including the market for 185 trillion dollars in outstanding euro-denominated derivative contracts, will be in turmoil and there will be large scale capital flight out of Europe into the United States and Asia. Who can be confident that our global megabanks are truly ready to withstand the likely losses? It is almost certain that large numbers of pensioners and households will find their savings are wiped out directly or inflation erodes what they saved all their lives. The potential for political turmoil and human hardship is staggering.

For the last three years Europe’s politicians have promised to “do whatever it takes” to save the euro. It is now clear that this promise is beyond their capacity to keep – because it requires steps that are unacceptable to their electorates. No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end.

Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF’s leadership are already covering their tracks, implying that corruption and those “Greeks not paying taxes” caused it all to fail. This is wrong: the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also. Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery. We cannot blame corrupt Greek politicians for all that.

It is time for European and IMF officials, with support from the US and others, to work on how to dismantle the euro area. While no dissolution will be truly orderly, there are means to reduce the chaos. Many technical, legal, and financial market issues could be worked out in advance. We need plans to deal with: the introduction of new currencies, multiple sovereign defaults, recapitalization of banks and insurance groups, and divvying up the assets and liabilities of the euro system. Some nations will soon need foreign reserves to backstop their new currencies. Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.

Unfortunately for all of us, our politicians refuse to go there – they hate to admit their mistakes and past incompetence, and in any case, the job of coordinating those seventeen discordant nations in the wind down of this currency regime is, perhaps, beyond reach.

Forget about a rescue in the form of the G20, the G8, the G7, a new European Union Treasury, the issue of Eurobonds, a large scale debt mutualisation scheme, or any other bedtime story. We are each on our own.

A version of this material appears also on the Huffington Post.

Not a pretty picture.

[DanS]

This isn't looking very good for Spain. The way the Europeans have handled this is maddening.

[C0ckney]

nye, i broadly agree with that article. although i don't think that germany will leave the euro. european politicians have shown no ability for bold and decisive action, i don't see that changing.

i read about some spanish retail sales figures a couple of days ago. turns out they're about the same on an indexed basis as greece...

[Barnabas]

Merkel needs to print euros like crazy, create inflation, devaluate the Euro, or it is all over.

[notyoueither]

This isn't looking very good for Spain. The way the Europeans have handled this is maddening.

Are you referring to this?
http://www.economist.com/node/21556238

The euro crisis
How to save Spain
The focus should be on fixing the banks, not on cutting the deficit

Jun 2nd 2012 | from the print edition

GREEK politics may determine the euro’s short-term future, but it is Spain that poses the single currency’s most difficult problem. The euro zone’s fourth-biggest economy is caught in an increasingly desperate spiral of deepening recession, drowning banks and soaring borrowing costs.

Spanish firms and banks are all but cut off from foreign funds. On May 30th yields on ten-year sovereign bonds rose above 6.6%, close to the level at which Greece, Ireland and Portugal had to seek a bail-out. After the government’s botched nationalisation of Bankia, a troubled savings bank, Spanish depositors are jittery (see article). A bank run is all too plausible—especially if Greece, which is bracing itself for a fresh election on June 17th, is forced out of the euro soon. Even if that calamity is avoided, Spain’s slump will drag the country inexorably towards insolvency.

Time to solve Spain’s debt crisis is running out. Doing so requires a radical rethink in Madrid, but above all in Brussels and Berlin. Spain’s government should be free to focus less on fiscal austerity and more on cleaning up the banks. Its European partners should also help by allowing joint rescue funds to be injected directly into banks.

The problem in Spain is not that its politicians lack the resolve to reform. In recent months Mariano Rajoy’s new conservative government has pushed through a labour-market overhaul. Over the past year or so Spain has pared pensions and written debt limits into the constitution.

Spain’s problem is one of misdiagnosis. Its government and European officials reckon the main challenge is fiscal. They argue that the budget deficit, which reached 8.9% of GDP last year, must be brought down as fast as possible to boost confidence and cut borrowing costs. Spanish politicians have dithered about cleaning up the country’s banks, for fear that doing so would demand an injection of public funds which, in turn, would worsen the government’s finances.

Private debt, public pain

This fiscal focus gets things exactly backwards. Spain’s poor public finances, unlike those of Greece, are a symptom rather than the cause of the country’s economic woes. Before the crisis Spain was well within the euro zone’s fiscal rules. Even now its government debt, at around 70% of GDP, is lower than Germany’s. As in Ireland, the origins of Spain’s debt problems are private, not public. A debt binge by Spanish households and firms fuelled a property bubble and left the country enormously in hock to foreigners. After adjusting for all the foreign assets they own, Spain’s households, firms and government collectively owe foreigners almost €1 trillion ($1.25 trillion), or more than 90% of GDP. That is on a par with crisis-hit Greece, Ireland and Portugal, and far higher than in any other big rich economy. Spain’s banks were the conduit for this private borrowing binge, and are being hit hardest by the bust.

Fortunately, the long history of bank crises shows what needs to be done. Rather than doing too little too late, as it has so far, Spain’s government should quickly admit the scale of the problem, clean up the banks, preferably by removing bad assets, and shut down, or recapitalise, what is left. All this inevitably costs public money: an average of 10% of GDP in previous episodes, though much more in some countries, notably Ireland. In rich countries governments typically borrow the money from the markets. In emerging economies that cash has usually come from international rescue funds.

Spain’s government might be able to cover the costs itself. It could inject as much as €100 billion, or 10% of GDP, into its banks and still keep sovereign debt below 100% of GDP. But if the problem turned out to be Irish in scale, it would need help; and anyway, putting money from European funds into Spain’s banks would boost confidence more convincingly. If euro-zone countries collectively injected funds directly into Spain’s banks, the rescue would do less harm to Spain’s public finances, and the vicious link between the country’s weakening banks and its worsening sovereign debt would be broken.

The idea of European-funded rescues for struggling banks has support from the IMF and the European Commission. But there are political hurdles. Allowing the European rescue funds to put money into banks requires approval from national parliaments. Germany objects, on the ground that putting money directly into banks leaves less room for extracting policy reforms in return. That need not be the case. European rescuers could demand reforms as a condition of putting cash into banks, much as if they were lending to the Spanish government. The difference is that a jointly funded plan to deal with the banks might actually work.

German resistance to things that might fix problems and insistence on things that make things worse seem to be recurring themes. I always ask myself, if this is the answer, what is the question? Does Germany want the weaker sisters to leave the Euro?

[DanS]

I don't think it's an either-or. Spain needs to get control over its finances and it needs help overcoming the lack of market access because of the overhang from its banks. Germany's politicians need to bite the bullet and be creative. Spain is a much better investment than Mexico, but the US did what was necessary to fund its bailout. Germany is trying to pass the buck to others higher up the chain.

[Lefty Scaevola]

Spain will be the make or break. The Eurozone can survice a Greek exit, but a Spain collapse or a Spain exit will end the Eurozone.