The market essentially called Germany's bluff-- prompting heavy selling of Spanish bonds after the anticipated 'bailout' was nothing more than a few billion thrown at commercial banks. As bond prices decreases, the yield or interest portion of the loan increases, making it more difficult for the government to meet its obligations.
It appears that 100 billion is a drop in the bucket for this risk averse market. The 100 billion Euros thrown at Spanish banks can easily be outweighed by two or three hedge funds making leveraged bets. Never mind the billions of dollars (perhaps trillions) that are already betting against the Spanish bond prices, banks and the overall economy.
The ECB can go a long way by developing credible and well capitalized insurance facilities, aimed at government debt, private sector preferred shares and commercial deposits. The longer the German's wait, the more expensive the proposition becomes, as the self-fulfilling prophecy takes hold. For now, a TARP sized bailout should provide the needed confidence, along the lines of 700-900 billion (US dollars). However, if further deterioration becomes a reality, the cost may escalate. Depending on the fallout, the necessary funds to keep confidence in the ECB monetary system could easily top 1 trillion (USD).
The Federal Reserve guaranteed the commercial paper markets during the 2008-2009 Financial Crisis, regardless of whether or not that debt was secured by collateral. This was important for many institution's ability to raise capital to make the necessary weekly payrolls, without which we were all dead. Insolvency may prove difficult to avoid if common equity continues to decline. Financing becomes more expensive, layoffs prompt layoffs and margin calls beget margin calls, compounding the effects of any runs on liquidity and deposits. The run on confidence must be avoided at all costs to move the market back to a steady state. The money chasers could care less if economic growth is normalized in the US and Germany if the countries around the EU are falling off a cliff. Germany must wake up and realize that they owe much of the power as an exporter to the inclusion of weak countries such as Greece and Italy. We may see Ms. Merkel get tough, but I am afraid it will only be when conditions are significantly worse.
For which he does not receive due credit -- Mr. Bush's second term in office allowed him to make the difficult decisions, granting Mr. Hank Paulson (aka 'The Godfather') the power to save the Financial System as we know it. Mr. Paulson's demeanor and the respect he commanded gave him the absolute authority to direct the banking system to do what was necessary to prevent complete catastrophe. It didn't hurt that he was worth hundreds of millions of dollars from tenure at GS, that just so happened that he had to put his money in a trust before taking position as Treasury Secretary.
Even with her authority, it appears Ms. Merkel does not have the clout and respect as Mr. Paulson commanded. Perhaps she should try demanding, or better yet, earning respect from the markets. Right now, the markets are wiping their ass with the ECB's pathetic attempt at a bailout. The time may be approaching for Ms. Merkel to (wo) man-up and take one for the team. After all, your days will be numbered.
It appears that 100 billion is a drop in the bucket for this risk averse market. The 100 billion Euros thrown at Spanish banks can easily be outweighed by two or three hedge funds making leveraged bets. Never mind the billions of dollars (perhaps trillions) that are already betting against the Spanish bond prices, banks and the overall economy.
The ECB can go a long way by developing credible and well capitalized insurance facilities, aimed at government debt, private sector preferred shares and commercial deposits. The longer the German's wait, the more expensive the proposition becomes, as the self-fulfilling prophecy takes hold. For now, a TARP sized bailout should provide the needed confidence, along the lines of 700-900 billion (US dollars). However, if further deterioration becomes a reality, the cost may escalate. Depending on the fallout, the necessary funds to keep confidence in the ECB monetary system could easily top 1 trillion (USD).
The Federal Reserve guaranteed the commercial paper markets during the 2008-2009 Financial Crisis, regardless of whether or not that debt was secured by collateral. This was important for many institution's ability to raise capital to make the necessary weekly payrolls, without which we were all dead. Insolvency may prove difficult to avoid if common equity continues to decline. Financing becomes more expensive, layoffs prompt layoffs and margin calls beget margin calls, compounding the effects of any runs on liquidity and deposits. The run on confidence must be avoided at all costs to move the market back to a steady state. The money chasers could care less if economic growth is normalized in the US and Germany if the countries around the EU are falling off a cliff. Germany must wake up and realize that they owe much of the power as an exporter to the inclusion of weak countries such as Greece and Italy. We may see Ms. Merkel get tough, but I am afraid it will only be when conditions are significantly worse.
For which he does not receive due credit -- Mr. Bush's second term in office allowed him to make the difficult decisions, granting Mr. Hank Paulson (aka 'The Godfather') the power to save the Financial System as we know it. Mr. Paulson's demeanor and the respect he commanded gave him the absolute authority to direct the banking system to do what was necessary to prevent complete catastrophe. It didn't hurt that he was worth hundreds of millions of dollars from tenure at GS, that just so happened that he had to put his money in a trust before taking position as Treasury Secretary.
Even with her authority, it appears Ms. Merkel does not have the clout and respect as Mr. Paulson commanded. Perhaps she should try demanding, or better yet, earning respect from the markets. Right now, the markets are wiping their ass with the ECB's pathetic attempt at a bailout. The time may be approaching for Ms. Merkel to (wo) man-up and take one for the team. After all, your days will be numbered.
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