Another Sunday bailout of Europe. What else did you expect? By this point we’ve all seen this movie 100 times so this should not come as a big surprise. European leaders have made it clear that they’ll do anything to avoid a Lehman 2.0, but the problem is that they won’t do enough to actually fix the Euro.
In case you haven’t heard the news yet, here’s Reuters:
“(Reuters) – Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.
After a 2-1/2-hour conference call of the 17 finance ministers, which several sources described as heated, the Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.
“The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total,” a Eurogroup statement said.”
What we have here is another avoidance of the worst case scenario, but not enough to solve the structural problem in Europe. This is and has always been a currency crisis stemming from the flawed structure of the currency union. This debt issue that’s ravaging the banks is just a symptom. Goldman summed up the latest move pretty succinctly (via Business Insider):
“Will this step be sufficient to forestall a broader programme for Spain with additional conditionality? By itself: No. Instead, in our view it needs to be accompanied by a fiscal plan specifying fiscal measures that will set Spanish debt on a sustainable path in the medium-term. This is still less of a Euro area-wide solution, but continues in the spirit of a country-by-country approach.
A one-off loan of less than €100bn or 10% of GDP is not, by itself, a major threat to Spain’s debt sustainability. The threat to Spain’s debt sustainability instead comes from the lack of a medium-term plan to stabilise its debt-to-GDP ratio over the next 5 or so years. The weekend’s announcements will do little to change that.”
So, this is simple. It’s enough to avoid the worst case scenario that many investors have been fearful of lately, but not enough to fix the underlying problem. This means depression continues in much of Europe and the politicians buy themselves a bit more time to come to a workable long-term solution. And of course, the banks get bailed out and Germany’s economy won’t be ravaged by a credit crisis as they hope things magically turn around and no major concessions are needed on the fiscal side of the currency arrangement. This is a short-term solution that won’t work to fix Europe, but gives them all more time to come together on something permanent….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.