Spain secured a €100 billion bailout for its banking sector over the weekend but its borrowing costs have been rising.
Pointing to Japan as an example, Societe Generale’s Albert Edwards says Spain’s banking sector isn’t the problem.
Edwards references equity guru Peter Tasker’s call on the Japanese lost decade. Tasker had gone against consensus to say that the banking sector wasn’t the problem, rather it was the symptom of the country’s deflationary problem:
“Going through Japan’s lost decade with Peter Tasker was a prequel to our current plight. One of the key differences he had with consensus was on the banks. Consensus believed Japanese banks were at the apex of Japan’s economic woes and the main problem. Hence bank recapitalization was seen as the key to turning the economy around.
Peter’s view was that although the banking sector was indeed damaging the economy via a credit crunch, the banks were not the problem but a symptom of the problem: the true problem was deflation and the lack of stimulative policies. …And so it is in the eurozone. The Spanish banking sector is a victim of deflationary policies enacted at the behest of German economic orthodoxy. A bailout will solve nothing.
…Spanish banks need recapitalisation because of the deflationary policies forced on them to reduce Spain’s public sector deficit at a time when the private sector is also de-leveraging. Clearly this has a lot further to go and house prices will fall even further as a result.”
Edwards warns that the lesson to be learned from Japan’s experience is that deflationary policies need to be changed otherwise Spanish banks will be back for another bailout soon.
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