Cumberland Advisors economist Bob Eisenbeis believes Europe has now entered the pretend-backstop-was-real-the-whole-time phase of its crisis, comparing the continent’s largest banks to America’s notorious government-sponsored enterprises, Fannie Mae and Freddie Mac. “As opposed to viewing Spanish, and more generally European, banks as private sector institutions, it is more appropriate to consider them as super-GSEs, analogous to Freddie and Fannie. Like Freddie and Fannie, European super-GSEs are perceived to be government-guaranteed entities that will not be permitted to fail or to impose losses on providers of funds. In fact, now that Freddie and Fannie are in receivership and are essentially government-owned entities, the parallels are even stronger.”
As with Fannie and Freddie, the problem is now one of solvency, not liquidity, Eisenbeis says.
And that’s not all:
“To make matters worse, we still don’t know the true magnitude of the problems or exactly how the bailout will be structured, and hence markets are reacting to the present bailout/recapitalization difficulties with healthy scepticism. In fact, rumours that the injected funds in Spain will be senior to existing funding sources should only accelerate the exodus of wholesale funding and raise the costs of funding to Spanish banks, because of uncertainty about the ability to get repaid in the event of a default.”
Finally, as the U.S. learned, simply throwing money at the problem will not make it disappear.
“The bottom line here is that we are seeing a market response to uncertainty that governments will live up to their explicit and implicit commitments to guarantee the liabilities of their GSE banks. This is a referendum on the sovereigns, their solvency and will to face their problems, and not their banking systems. In the US, our experience with state-sponsored deposit insurance funds should serve as a stark warning sign on the road the Eurozone is currently travelling. Every one of those deposit-guarantee systems went under when the sponsoring states were either unable or unwilling to live up to their commitments. Simply injecting funds, which is the current European response, without dealing with both the banking-structure issues and fiscal concerns, will not solve the problem.”
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