Time is the often referred to as the most valuable commodity, once spent you will never get it back making every minute ever more valuable to the individual. However in my mind time has become ever more increasingly valuable in real terms. The Eurozone crisis has effectively put a price on time. Back in November the ECB enacted a programme called the LTRO (Long term refinancing operation), it was in basic terms a trillion euro loan to European banks for 3 years in an effort to satiate the European debt crisis and calm the fear that was so prevalent at the time. For a while it worked, so there starts your price discovery mechanism. One trillion Euro buys you three years of calm. Unfortunately what often happens with price discovery the price of this went higher. The LTRO calmed fears and markets rallied for a period of about 5 months until fresh new fears mounted and Europe came under the kosh again sparked by ever weakening economic data coming from the Eurozone and escalating political situation in Greece and weak conditions in Spain. So really a trillion Euros buys you 5 months calm. Yikes time just became a lot more expensive.
The recent Spanish “bailout” or “assistance programme” depending on what team you are on can therefore be described as another ineffective mechanism to calm the European debt crisis. The headlines say markets rally on Spanish bailout etc etc when in fact no such thing has even happened yet. The Spanish have not been bailed out. At best there is a gentleman’s agreement to lend Spain something in the region of EU100BLN euros, no-one has even agreed on the figure yet. We don’t even know where said money is going to come from, will it be the EFSF or will it be the ESM? both bailout funds but both have very different ways in which the debt is secured.
All this, is a feeble reaction from the Eurozone government’s namely Germany to rising fear in the markets and an attempt to buy some time. Looking above at my summation of the LTRO scheme then it appears EU100bln will not buy them that much time if indeed it does happen at all.
Einstein said the definition of insanity is doing the same thing over and again and expecting different outcome. Why Europe thinks another token EU100bln will solve the problem is beyond me, when 1 trillion euro only managed to calm things for about 5 months? 1 trillion euro by the way looks something like this 1,000,000,000,000, that is a whole lot of money been pumped into the system and it hasn’t really had the desired effect, if anything one could say things are as bad if not slightly worse now. What good is throwing another 100bln euro at it?
At best the Spanish “bailout” will allow Spanish Cajas (like credit unions) to delay the inevitable write downs on toxic loans to developers for a period of time yet to be determined. Judging by my incredibly loose calculations above my guess is it won’t be a long time. It will do nothing for Spanish unemployment circa 25% or youth unemployment circa 50% and all it will do is further contribute to the process of turning a Spanish banking crisis into a sovereign debt crisis. I.e transferring private debt to public debt …..now where have I heard that before?