A Huge Step Forward
Advisors Capital Management
By Charles Lieberman
June 11, 2012
The Europeans have taken a major step in resolving their credit crisis,
although additional policy initiatives are still needed. Like the TARP
program in the U.S. in 2008, the 100 billion euro bailout of Spanish
banks should recapitalize those institutions sufficiently to cover their
real estate loan losses and enable them to regain access to the credit
markets. But the rest of Europe’s banks also need more capital. Greece
still needs to choose a new government and that new government must
decide how Greece will work towards balancing its budget. Europe still
needs economic growth. And other Europeans governments must figure out
how they will bring down their deficits. Thus, considerable work
remains to be done, although the resolution of the Spanish bank capital
hole does resolve one of the most important problems troubling European
markets.
Spanish officials hoped that European governments might work around the
Spanish government and recapitalize Spanish banks directly, so the
Spanish government would not be responsible if the losses proved larger
than expected. This wasn’t very realistic and delayed a solution. The
Spanish government also wanted to avoid any conditions that might be
imposed by the Europeans on the Spanish. The compromise was the
Europeans loaned the money to the Spanish government, so it remains on
the hook for additional losses, but no other conditions were imposed.
Now, Spain must figure out how to get growth going, so that it can make
more progress reducing its budget deficit. But, everyone in Europe will
be seeking growth policies, too.
Most immediately, attention will turn to Greece’s election next weekend,
although Greece is not such a large concern any longer. Having already
written down its public bonds by 70%, European investors have much less
to lose if Greece defaults again. The decay of Greece’s economy into
chaos over the past few months has also caused voters to reconsider.
The public seems to recognize that while it may justifiably blame all
the previous governments for mismanagement, it makes little sense to
elect radicals who seem to have only anarchy as their objective and
little in the way of programs to deal with their fiscal mess. Spending
more is hardly a solution when they cannot fund current spending.
Moreover, Greece is too small to be important, especially after the rest
of Europe has already taken its losses. The Greeks can now only hurt
themselves.
The next really important policy initiative is whatever is needed to
restore credibility in the markets for the rest of Europe, notably
Italy. However, Italy’s budget situation is not so terrible. Italy is
running a surplus, excluding interest payments, and its budget deficit
is falling relative to GDP. Italy has also suffered no real estate
collapse. Still, some sort of pan-European support structure, one that
can provide significant cash to any nation experiencing financing
problems, would really douse the flames. Once economic growth resumes
in Europe, calm should return over the course of some time. The
Europeans are not done yet, but a major step forward has been taken.
(c) Advisors Capital Management
