A Cold Gust Of Fear Descends Over Europe’s Bankers

It’s been quite a while since we heard much about the PIGS.  Yet they haven’t gone away.  Irish 10 Year Bonds are paying near 9%, up from 4.5% three months ago, and getting close to critical as sellers are panicking and trying to get out in droves, with Ireland’s ability to survive being limited to the next three months according to one Dublin economist.
The issue is not one of numbers, but of emotions battling with each other.  The ECB makes reassuring noises saying that the money is available to bail out Dublin as soon as they request it.  The problem is though, that the money isn’t available.  A package first has to be agreed by all the other members of the EU, and they have to raise the cash on the agreed dates.  The process can take weeks as it did with Greece’s bail-out.
The level of reassurance is not all that great.  As each bail-out is requested or demanded, and the other countries within the EU are forced to pay out, they are starting to suffer what might be termed bail-out fatigue.  Most other EU countries are finding tax revenues are slowing, and their own deficits are widening.  Merkel is demanding that, in future bail-outs, bond-holders be forced to take losses when the countries they have lent to fall into arrears.   This is manna from heaven for short sellers, and is only adding to the level of fear, and is tantamount to admitting that there will be defaults.  Bond holders are in shock as they never imagined a day would come when they would be asked to take losses.
And the sums involved are simply massive.  One of the banks in the firing line is the British Bank, RBS.  Let one of their economists describe the raw feeling in his stomach currently spoiling his digestion.
In a report published Thursday, Jacques Cailloux, an economist at theRoyal Bank of Scotland, pointed out that banks outside of Greece, Portugal, Spain and Ireland hold €2 trillion in debt instruments from these countries, underscoring the systemic risk to the financial system if one or more failed.
“Does the E.C.B. understand the concept of contagion?” he asked.
Mr. Cailloux argued that the European Central Bank needed now to be a more aggressive buyer of bonds from the weak countries, and that until it takes this step, even the activation of the European Financial Stability Fund to bail out Ireland or Portugal would not prevent a wider panic if the contagion spread to Spain, the fourth-largest economy in the euro-zone after Germany, France and Italy.
You don’t need to read between the lines before realising that the problem is, potentially, far bigger in size than the solution being offered, and is happening far quicker than the bail-out boys are able or willing to react.
I hate to say it, but the situation is fast approaching crisis level.  It is not surprising when you think that in Britain the government is being offered free money to try to shore up its reserves by Foundation X.  Those in the know know just how bad the situation is, and they are very worried indeed.   Central bankers all have investments too, you know, and they would bail the situation out if they could.  But it’s simply on too vast a scale to be bailable.  That’s the truth that no  one is prepared to admit, as yet.

FT wrote last night –

Evidence is growing of the impact that Ireland’s record cost of borrowing is having on the wider eurozone, with signs of contagion spreading throughout the debt markets of the single currency bloc.

Irish bond yields hit fresh highs while the extra cost that Italy and Spain pay for borrowing over Germany jumped to levels not seen since the launch of the single European currency in 1999.

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