The Bank Jog

It’s where the money is.

Europe Fears Bailout of Spain Would Strain Its Resources

By LANDON THOMAS Jr., The New York Times

Published: May 30, 2012

At the root of Spain’s financing crisis has been a drastic outflow of foreign capital from the country – one that, paradoxically, has been accentuated by the European Central Bank’s much-vaunted program of providing low-cost three-year loans to European banks so that they might buy their governments’ bonds.

But in the case of Spain, the program evidently bought time by making the country’s underlying problems all the worse. Spanish banks have by far been the most aggressive participants in the cheap-loan program, having borrowed more than €300 billion from the E.C.B. And much of that money was spent on Spanish government bonds.

It’s not just Spain, either.

Italian banks have also been enthusiastic buyers of their government’s bonds, and they own 57 percent of bonds outstanding. As in the case of Spain, foreigners have been obliging sellers and have sold €242 billion worth of bonds to local banks, bringing their share in Italian bond holdings down to 35 percent as of this March compared with 51 percent late last year.

It is worth noting that just before the restructuring of private-sector Greek debt in March, foreign investors owned 32 percent of the bonds outstanding, a higher proportion than what foreigners now own in Spain.

The fact is this notional overestimation of wealth is going to have to come of the pockets of the rich because that’s where the money is.  If you seized everything from the bottom 50% it simply wouldn’t be enough.


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