Bankrupt Europe? It's the Banks, Stupid!
April 25, 2012 • 5:32AM

With all their austerity policies and banking rescues, the euro-countries last year amassed a record amount of debt, EU8.215 trillion, with the debt-to-GDP ratio increasing to 87.2% at the end of 2011, compared to 85.3% in 2010. The fact that the bankrupt banks are responsible for the mess, can no longer be hidden, due to the enormity of the problem, and the calls for direct rescue operations are growing ever louder. The newest fad is to create a new fund and a Bad Bank on the European level, this linked to the ESM. Thus, the necessity to finally impose Glass-Steagall becomes clear to even the most blinded person on Earth, before everything ends up in a hyperinflationary blowout and social explosion!

Spain has hundreds of billions in bad real estate credits. Eurostat just has published new figures, which show that the Eurozone countries took over or guaranteed more than EU1,100 billion in banking liabilities. Süddeutsche Zeitung reports that in Spain, almost every 12th loan is bad, the highest number in two decades. The bursting of the real estate bubble put something like EU180 billion worth of loans into question.

Tuesday the Financial Times Deutschland's Brussels office chief, Peter Ehrlich, writes an article headlined, "Finally, Move Ahead to the Core of the Crisis: The Eurozone Needs a Common System To Support and Restructure Banks." Ehrlich praises the "ECB approach" to "Europeanize the restructuring and dissolution of banks" and refers to a proposal by Jörg Asmussen, to create a fund (supposedly financed by the banks) for restructuring, which would put toxic assets into a Bad Bank, the whole thing to be located with the ESM. That would replace or limit the national banking rescue funds, like SOFFIN II in Germany, which holds EU400 billion in guarantees. Ehrlich then goes through how the problem in Spain and in the eurozone as a whole is the banks.

This approach is presented as a sort of "alternative" to the direct pumping of money into the banks through EFSF and ESM, which the German government (so far) is rejecting. IMF Managing Director Christine Lagarde, in contrast, calls exactly for that, incredibly referring to such bailouts as "a step towards a better and stronger Europe." In Ireland, Prime Minister Enda Kenny is quoted yesterday, that the Fiscal Pact and ESM should be ratified everywhere, and then be changed to allow the direct bailout of banks! There you have it. He hopes for a "rational discussion" with his colleagues. As reported, the Spanish government demands the same for the bankrupt Spanish banking system.

Bundesbank board member Joachim Nagel is quoted in the press, saying that a direct injection by EFSF or ESM would mean that the balance-sheet risks of Spanish taxpayers would be put onto all European taxpayers. Commerzbank's chief economist, Jörg Krämer, rejects it, because "without guarantees" such credits to Spanish and Irish banks carry a very high risk for taxpayers. Andrew Boomworth, investment chief for PIMCO says: "The rescue fund lacks the authority to hand out such credits. However, it would be different if we had an EU banking authority." Spain should first try to recapitalize its own banks.

Otherwise, the ECB announced Monday that banks have to provide more information about their asset-backed securities (ABS), which they hand in to get new money. This information is to be provided one month before any modification of the ABS. Supposedly, this is a lame effort to increase the standard again for these assets and to "lower the risks" of their bailout of banks. What effect this will have, is unclear, but it certainly will not solve the problem of the gigantic bubble that the ECB has created; maybe it will serve as a little goodie for the critics in the Bundesbank.