The WSJ reported Wednesday night that Spain is planning on injecting more capital into the cajas – the segment of their banking system (accounting for 40% of assets) that look like banks on the outside but more closely resemble government slush funds on the inside.
The eurozone’s peripheral economies still must deal with the heightened risk that a run on the banks may occur as governments are finding their previous efforts feckless. Spain says this latest bailout fund could need $130 billion. Well, they’ll have to borrow those funds, which is on top of the $165 billion they need this year just to roll maturing debt – those are huge amounts for a $2 trillion economy.
The EU and IMF are going to do everything they can to thwart the worst of the eurozone’s debt crisis from occurring, but this issue is going to get much worse before it gets better. Kick it down the road all you want, but the ultimate cure is either several years of above-trend growth or serious debt restructuring. The latter is far more realistic and that means losses for the banks and other investors. Losses? Oh the humanity, no one’s supposed to accept losses in this sudden era of perpetual government backstops. Yes, it’s true; eventually everyone understands the government backstopping game is not a solution but merely that which delays.