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Five charts that tell the European disaster story

9:50 am - May 28th 2012

by Frances Coppola    

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As you all know by now, I like charts. They tell stories.

1) Here’s a pretty chart from Europe. It tells us that unemployment in Europe was falling, generally, until 2008.

Since then it has risen sharply and continues to rise in all these countries except Germany.

(apologies for Google’s misplacing of UK’s label – should be between Germany & Italy).

* * * * * * * * * * * * *

2) Then there’s this chart, which tells two stories. The first is the effect of the Euro in synchronising growth among Eurozone countries. The synchronicity is striking – the UK, which is not a member of the Euro, stands out like a sore thumb.

This chart suggests that the Eurozone countries are coupled closely together and an adverse shock in one is likely to have serious consequences for the rest – as we are seeing at the moment.

The second story that this chart tells is related to my first chart. All the Eurozone countries in this chart were growing at a similar pace – until 2008. The UK’s collapse starts earlier, but the rate of collapse steepens in 2008. And NONE of these countries – not even the mighty Germany – has yet recovered.

In most of them, GDP is still falling (the scale of this graph means that the catastrophic collapses of Ireland and Greece don’t show up clearly as their economies are much smaller than the rest).

* * * * * * * * * * * * *

3) Since 2008, unemployment in Europe has risen as GDP has fallen. In some countries the fall was sharper than in others.  This might have something to do with it:

* * * * * * * * * * * * *

4) Government debt as a percentage of GDP has of course risen as GDP has fallen. But ABSOLUTE government debt in Euros has also risen. The spike in Germany’s debt is caused by its support of other Eurozone countries, notably Greece.

* * * * * * * * * * * * *

5) In the final chart, note the sustained upward trend in absolute government spending, in contrast to the SUDDEN rise in government spending versus GDP in 2008 and, in most countries, the slight fall since. If you compare this chart to the GDP chart you will see that the rise and fall of this graph is caused mainly by changes in GDP.

* * * * * * * * * * * * *

There is a constant theme throughout this post: the European economic landscape changed fundamentally in 2008. Unemployment has risen, GDP has fallen, government debt has risen – in some cases almost sufficiently to bankrupt the country – and government spending has risen.

What happened in 2008 was not a sovereign debt crisis. Nor was it a currency crisis. It was a banking collapse.

That collapse forced private debts onto sovereign balance sheets. It caused the deepest recession since the 1930s. It caused job losses and wage cuts across Europe, leading to increases in benefits bills and consequent rises in government spending. It caused economic stagnation as banks cut back lending, restricting the business finance essential to economic growth.

And what is STILL GOING ON in Europe is a banking collapse. The banking collapse of 2008 has not ended. We have not repaired our broken financial system. We are still terrified of the consequences of bank failure.

We are sacrificing the future of an entire generation to prop up insolvent financial institutions and a failed currency experiment. WE ARE STILL BAILING OUT BANKS. The latest is Bankia. It will not be the last.

The worst is yet to come.

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About the author
Frances is an occasional contributor to Liberal Conspiracy. She spent 17 years of her life working at a senior level in banks, but now is a professional singer, singing teacher and image consultant. She blogs here.
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Reader comments

1. Luis Enrique


There is no either/or about a sovereign debt crisis and a banking crisis – a sovereign debt crisis can cause a banking crisis, if the banks hold lots of sovereign debt.

You seem to be saying the sovereigns got in trouble because they had to take on private debt, presumably when they bailed out the banks. I’m not sure about this – Duncan had a chart showing that’s certainly wan’t the case for the UK, the cost of the bank bailouts being dwarfed by the effect of collapsing tax revenues and rising expenditures caused the the recession (and bank bailouts also involve acquiring assets so the net effect may differ greatly from the gross cost). I guess it’s true of Ireland. But I don’t think Greece, Italy or Spain got in trouble because the government couldn’t bear the burden of bailing out their banks, did they?

What about a central banking crisis?

The ECB raised rates going into the biggest financial crisis this side of the 1930s. The ECB’s policy rate is still 1%, they raised rates last year under Trichet (history’s greatest monster). Demand growth in Europe is pitiful but the ECB refuses to yield, and that is despite the collapse of the monetary base in the periphery. I think you’re graphs fail to capture a major theme of the Euro crisis and make it seem more intractable than it is.

Is it possible to do a version of Graph 2, but showing GDP per capita?

4. Luis Enrique

n.b. if there’s a path that does not involve “sacrificing the future of an entire generation” because we choose not to prop up failing financial institutions, I’d love to hear about it. How does this generations prospects improve if Europe’s banks are allowed to collapse? Will unemployment fall if banks go bust?

“Is it possible to do a version of Graph 2, but showing GDP per capita?”

No because that might prevent the writer making meaningless conclusions on the basis of meaningless pseudo data.

I think it fair to say that 2008 was a banking crisis, feeding off too much sub-prime mortgage debt. Some banks collapsed, and needed bailouts. In the case of Ireland, the size of the banking sector and it’s distressed mortgage debt caused the necessary bailouts to overwhelm the soverign.

In the UK and US though, bank bailouts haven’t really done huge lasting damage to the country’s fiscus – in the UK all but about 10bn has been paid back, and in the US it is primarily non-bank entites which caused most of the burden (AIG, Fannie, Freddie).

The issue is that debt was re-rated after the crisis, causing people to have a long hard look at sovereign credit risk. And quickly people found that many countries were sorely lacking – specifically the PIGS countries, but many more peripheral ones besides. Greece and to a lesser extent Portugal are in crisis simply because of sovereign debt and spending problems. Spain partly has the same issue, especially at regional level, but also has mountains of crummy mortgage debt in the Cajas. So there is an element of banking crisis there.

It’s not the investment banks which are really the issue in this crisis though. They mark their bonds to market, and thus have already taken the losses on their Euro debt. The problem lies within local retail, housing and mortgage banks, whose mortgage assets are marked far higher than their true worth and are plummeting in value, and their balance sheets are backed by government bonds also collpasing in value.

So this crisis is part retail banking crisis, and certainly part sovereign debt crisis, but the investment banking crisis has near enough run its course.


“Is it possible to do a version of Graph 2, but showing GDP per capita?”

No because that might prevent the writer making meaningless conclusions on the basis of meaningless pseudo data

The data itself does have an option for GDP per capita (current US$):

2007 2008 2009 2010

Germany 40,403 44,132 40,275 40,116

France 40,460 44,117 40,663 39,448

UK 46,123 42,935 35,129 36,343

Italy 35,826 38,563 35,237 34,075

Spain 32,130 34,988 31,891 30,549

Netherlands 47,771 52,951 47,998 46,904

Greece 27,241 30,363 28,521 26,607

Ireland 59,665 59,574 50,034 46,170

However, it states that that it is not adjusted for inflation.

Surely that would render any graph meaningless?

Is it possible to do a version of Graph 2, but showing GDP per capita?

Yes: http://bit.ly/KWrNLX

9. Luis Enrique

Frances says Bankia won’t be the last – here Simon Johnson and Peter Boone describe how all dominoes will tumble.


10. Luis Enrique

that Baseline Scenario piece is scary stuff

Looking at the figures for Spain, it occurs to me that the right’s narrative about the financial crisis being caused by (and continuing because of) soft-hearted leftists giving money and free healthcare/education to undeserving poor people is very Greece-specific. It’s likely to fall over badly if/when the crisis spreads, at least if we assume some sort of interest in investigating reality on the part of the media.

The narrative at least has some sort of plausibility in Greece, where the government did have a high level of debt to start with, although benefits weren’t really unusually generous – it was more about being very inefficient administratively, and very bad at collecting tax from companies and the wealthy (an unofficially low tax rate on ‘job creators’ which according to right wing ideology ought to have stimulated the economy and maybe even reduced the deficit, but apparently that logic only applies when tax increases / avoidance crackdowns are threatened here, not in Greece).

But in Spain and Ireland, it’s not even arguable. It’s flatly false that the Spanish government was spending recklessly. Their level of debt was pretty low and falling pre-crisis. Ireland too was following the standard market fundamentalist prescriptions almost to the letter, and was lauded as an example to the world.

(BTW where is Portugal on these charts? Would have thought its situation was very relevant…)

@ Jungle

The Spanish problem is partly one of government. The local banks, or Cajas, are politically controlled to a great degree. As such, these banks made huge politcally motivated loans centred on propety deals.

Ireland followed market principles right up to the point where they said they would guarantee bank debt and liabilities, which left the state on the hook for billions of bad private debt in insolvent banks. The true free market principle here woulld have been to let them go bust – make no mistake, it was a political decision to save the banks.

A mistake they are replicating in Spain.

The GDP data are still pretty meaningless, unless they are adjusted for purchasing power parity.

Interesting, though, how much higher Ireland’s per capita GDP is than that of the UK. So much for disaster.

14. Frances_coppola


In the Eurozone, common monetary policy means only one inflation rate measured across all member states. I do agree that it would be better if these figures were adjusted for inflation, but it would only materially affect the comparison with the UK, really – because the UK has had higher inflation in the last few years. Would make no difference to the synchronicity and shape of the GDP chart for the rest, only to the height. I deliberately didn’t comment on that.

Have you looked at the population data for Ireland? The population is falling as young people are leaving. And “GDP per capita” tells you nothing about how much money people actually have to live on.

feeding off too much sub-prime mortgage debt.

Sub-prime mortgages were about 5% of debt held by financial institutions

16. Frances_coppola

1 and 4 Luis

Ireland and Spain are both in trouble because of bank debts. And other countries would be now too if their banks hadn’t been able to lay off much of their peripheral debt via the ECB. Even with that, Greek exit would have a seriously bad effect on French banks. It doesn’t really matter whether your banks are overexposed to dodgy mortgages and construction loans or overexposed to dodgy sovereign debt – either way the effect is a banking crisis. I don’t think that replacing sovereign bailouts with ECB bailouts is a stunningly bright idea, but that’s all the EU has come up with so far as a “solution” to this crisis.

If a bank is solvent but short of liquidity, then providing it with liquidity is the right thing to do – and the ECB is the right vehicle to deliver this. But providing liquidity to banks that are actually insolvent drains economies of money and depresses growth. The problem is how to distinguish solvent from insolvent banks – it can be hard to tell the difference. The EU needs to find a way to distinguish these reliably and put in place systems and procedures to wind up insolvent banks safely. So far it has only delivered stress tests that didn’t test anything useful, and a proposal for resolution procedures which is currently under consideration. The UK is ahead on this and I admit it was a little unfair to include it.

17. Frances_coppola

2 Left Outside

I might do another post on the central bank crisis (if you don’t do it first!).

The ECB’s interest rate policy undoubtedly contributed to Spain’s current difficulties and was probably the principal cause of the peripheral credit bubble. But it’s a trifle unfair to blame the ECB for this. Germany’s economy is the largest by far, so its economic needs dominate monetary policy decisions. And the ECB is undoubtedly very influenced by the Bundesbank. At the moment the German and peripheral economies are pulling in opposite directions, as the unemployment chart shows (although recent PMI figures do suggest a German downturn may be starting). Common monetary policy can’t accommodate such major differences between the economic needs of member states, so it is inevitable that smaller economies will have interest rates that may not be appropriate for them. I have suggested elsewhere that one way of defusing this would be for national central banks to do QE (or reverse QE, in the case of the Bundesbank). This would of course undermine common monetary policy and the central function of the ECB. But then arguably ELA has that effect anyway.

18. Frances_coppola

6 Tyler

Thanks for this. As you probably know, I am of the opinion that the European banking crisis has always been primarily a retail banking crisis, unlike the US crisis which was primarily investment banking (though fed by retail). The trouble is that allowing retail banks to go bust is much harder for sovereigns to accept, because the costs of failure rebound directly on to households and businesses. Because of this the European banking crisis is in my view far more intractable than the US one, which as you say has nearly run its course – and the US economy is therefore beginning to recover.

19. Frances_coppola

11 jungle

I agree it would be useful to show Portugal as well. I didn’t for a couple of reasons:
1) scaling – it’s a very tiny economy, so its GDP and government debt flat-line when put on the same graph as Germany, which is not exactly helpful. Though per capita figures would eliminate this problem
2) Eurostat unemployment data for Portugal is estimated.

20. Northern Worker

How many of these banks have balance sheets propped up by worthless sovereign debt and properties? That is, they are really bankrupt right now.

Over 500 European banks had their hands out when Draghi offered over a trillion euros in 3-year loans at next to zero interest. If that’s an indicator of how bad it is, can 500 banks be rescued? No way.

The problems, like Northern Rock, will escalate when there is a bank run on every bank in the southern eurozone. Nothing, but nothing will stop it and there will be no way of rescuing these banks.

21. Northern Worker

Oh, Frances, great charts. Like you, I loves charts and trends especially.

Over 500 European banks had their hands out when Draghi offered over a trillion euros in 3-year loans at next to zero interest. If that’s an indicator of how bad it is, can 500 banks be rescued? No way.

Eh? If someone offered me a three-year loan at next to zero interest, I’d take it, and my current financial situation is (not as much as I’d like, but still distinctly) in the black. Not sure “banks willing to take extremely good deal” can be generalised to “banks clearly insolvent”.

@ 18 Frances

I’d agree with what you say for the most part, but would note that even the US banking crisis was primarily one of retail banking….the investment banks got caught up in it when funding became next to impossible. The losses Lehmans and Bear took from Subprime/CDOs were in themselves not enoguh to sink the banks – it was the lack of short term liquidity which truly made them insolvent. It was the countrywides and the hundreds of other smaller retail banks which truly did the damage.

@ 20 Northern Worker

To be fair, the ECB has given out roughly a trillion EUR in 3 year LTROs….and the banks have given almost all of it straight back to them in short term repos. Seems odd, but makes sense for banks to do as even if they don’t need the funding, this strategy guarantees them lots of cheap funding in an emergency. Even though the LTROs are very cheap on paper, they are lending the money back to the ECB at even lower rates so this safety net is actually costing banks a bit of cash, and is turning a profit at the ECB.

But as you say, there are hundreds of retail banks, often state or politically controlled, who are absolutely full of bad mortgage debt and are supported by weak sovereign bonds.

@ 14 Sunny

What kind of journalist are you? Do you even bother checking facts in the most basic fashion?

From Wikipedia:

“The percentage of new lower-quality subprime mortgages rose from the historical 8% or lower range to approximately 20% from 2003 to 2006, with much higher ratios in some parts of the U.S.”

That’s before you get to the other low grade mortgages in the US (like Alt-A) and abroad. Northern Rock wasn’t brought down by sub=prime mortgages, but nevertheless the proportion of non-performing loans it had was something like 20% at one point. Across all SPanish banks bad loans are running around 10%, but it is much higher in some of the Cajas, who have their head in the sand about some of the write-downs they are going to have to take.

24. Frances_coppola

john b

That is indeed a problem. As I said. It’s not easy to determine whether a bank is just short of cash or actually bust. Insolvent banks can keep going virtually forever as long as you keep feeding them money on a regular basis. That’s part of what went wrong in Japan.

25. Frances_coppola

23 Tyler

I absolutely agree about the retail origin of the US crisis. But the US is well-prepared to deal with a retail banking crisis, and although hundreds of retail banks failed in the financial crisis the majority were small banks that were quickly and efficiently resolved by FDIC. The impact on households was terrible, of course, and I personally don’t think Congress did enough to support those who lost their homes or ended up underwater. But the retail crisis itself didn’t cause the systemic problems that the investment banking crisis did, particularly the massive and unprecedented run on the shadow banking network. In that respect I think it is different from the European crisis, where there is an incestuous relationship between retail banks and sovereigns and no real equivalent of FDIC.

26. Luis Enrique


thanks for the reply. I’m not denying there is a banking crisis, I’m arguing that doesn’t mean there’s no sovereign debt crisis. I’m sure having to support its banks is putting Spain under additional pressure, but Spain was and is in trouble quite aside from that.

You say rescuing insolvent banks “drains money” out of the economy – what does letting them go bust do? (and remember, we can print money). Also recall that a normal firm may be bankrupt because nobody wants to buy what it sells at a price that covers its costs, and it may never be viable. Banks can go bust if, say, they hold lots of sovereign debt which defaults, but once recapitalised may be perfectly okay again and there is no need to destroy all the human capital embodied in a bank by letting it go under. Plus the problem in EU is more a bank run than insolvency by now.

further to yesterday’s alarming analysis from Baseline Scenario, here’s Tyler Cowen being pessimistic about Spain


@ 25 Frances

We seem mostly to be in agreement, but I would point out a couple of things.

The retail banking crisis in the US was indeed resolved pretty well by the FDIC, and home loans were dealt with relatively quickly. Losses in the investment banking/shadow banking world weren’t as disastrous as some people make out though. As i say, Bear and Lehmans didn’t suffer huge losses from CDOs, they simply ran out of short term liquidity when money markets ceased to function. HSBC for example, wrote their home loan/CDO portfolio down by $20bn and nobody really batted an eyelid. A few hedge funds went down but we are talking losses in the order of billions, which could easily have been covered. The big losses were in Fannie and Freddie and at AIG, respectively from home loans and from CDS blowing out as credit risk exploded.

The situation in Europe is different partly as you say because of the lack of an FDIC equivalent. Thre is something else at play though, which you touch on with regards to the incestuous relationship between banks and sovereigns. Banks are forced to hold Tier 1 capital against their liabilities. This is normally in the form of government bonds – because governments make the rules and have declared their assets to be the main ones which fit that criteria. With Basel III they are actually extending that forcing banks to hold even more. What happens though if these self-same government bonds are the ones in trouble? Gordon Brown played a similar game when he forced UK pension funds to hold more Gilts….it’s a way for governments, via legislation, to rope financial markets via banks and pension funds, into what is little more than a huge circle jerk allowing the government to issue more debt at lower rates.

28. Frances_coppola


The evidence regarding Spain does not support your belief that it “was and is in trouble”. Its present difficulties stem entirely from the collapse of the housing bubble in 2008 which left its banking sector highly indebted and arguably insolvent. It was a model of fiscal rectitude until the 2008 crisis, it had low public debt and government spending as a proportion of GDP was lower than Germany’s.

Part of the problem with the Eurozone is that the countries CAN’T print money. The ECB can, of course, but it is reluctant to do so not least because the Bundesbank is adamantly opposed to it.

I do not agree that recapitalising insolvent banks is better than allowing them to fail. Apart from anything else, it is impossible to break the unhealthy funding loop between banks and sovereigns if banks are never allowed to fail. Yes, the reason for failure may be overexposure to worthless sovereign debt. But that’s not a reason to rescue them. Commercial institutions should suffer the consequences of bad investment decisions.

@28 Frances

Indeed, bailing out banks who are heavily laden with worthless mortgage debt by filling their boots with soon-to-be worthless sovereign debt just compounds the problem.

Far better to go the US route, and have losses from housing/mortgages split between mortgage holders and banks (with a measure of deposit protection from FDIC). It’s not pretty, but at least it does actually deal with the problem, allowing the economy to start to move on – attested to by the US relatively good growth/recovery.

30. Luis Enrique


yes, it’s well known that Spain’s public finances looked strong pre-2008, I haven’t written anything blaming Spain’s problems on excessive government spending (although the case could be made: take a look at Spain’s white elephants) – you rightly blame Spain’s property bubble – so why doesn’t having an almighty property bubble burst count as being “in trouble” of itself? That’s what I was thinking of. Look at it this way, imagine Spain was able to easily bail out its banks (let’s say the ECB decided in effect to print money to recapitalise Spain’s banks) would the Spanish economy still be in trouble? Yes. So Spain isn’t in trouble just because of the burden of bailing out its banks. There are all sorts of other problems (the inability to devalue its currency etc.) – of course there’s a banking crisis – anything that goes seriously wrong with an economy comes with a side order of banking crisis – my point all along is that you don’t have to pick one problem and deny all others, you can acknowledge lots of problems at once.

it’s often written that economics is a morality play – you say insolvent banks should not be bailed out, but you haven’t said much about what the consequences of letting banks go under are. You have expressed concern about the hardship being imposed on people by the current crisis, but if letting the banks go under would deepen the recession, increase unemployment etc. where is your “should” then? What happens to Spain if its banking system is allowed to collapse?

31. Luis Enrique

isn’t a morality play

32. Frances_coppola

30 Luis

I don’t think you’ve read what I actually said in the post properly. I said that what happened in 2008 was a banking crisis, not a sovereign debt or currency crisis. And I said that there was still a banking crisis in Europe, that the 2008 banking crisis never actually ended. At no point did I suggest that there were no other problems.

Nor have I made any of this into a morality play. I have cited evidence from Japan that continually supporting insolvent banks depresses growth. I have pointed out that the US, which did allow retail banks to fail – by the hundred – is now returning to growth: Tyler has also made the same point. I think the benefit from winding up insolvent banks rather than recapitalising them at taxpayer expense is clear. But Europe not only hasn’t allowed its banks to fail, it hasn’t recapitalised them either. It is stuck in limbo, unable to free itself of the burden of insolvent banks, keeping them just alive by inadequate liquidity injections. I’ve suggested that the Europe should repair its banking system by 1) making liquidity FREELY available to solvent banks (that doesn’t mean “free”, though – banks should be charged for it) 2) resolving insolvent ones. You prefer to address 2) by pouring yet more sovereign debt into them. I think it would be better to get rid of them. But either would be a vast improvement on the present situation.

33. Luis Enrique


it’s difficult to discuss via blog comments, and hard to avoid taking people to mean what they did not. Yes, you did not say there were no other problems – but I think you did mean to say the Euro crisis was not a sovereign debt crisis. I disagree, and w.r.t Spain I think that the implosion of Spain’s property-plus-foreign-financing economic model (have a look at this post on Spain Economy Watch and other of his Key Posts on the side bar) meant that the Spanish public finances were headed for crisis (revenues collapsing, unemployment up, a deficit nobody wants to finance) once everybody starting fretting about sovereign defaults and Euro exit, and whilst the banking crisis only makes matters (much) worse, I don’t think it’s a case of either/or (which is what I wrote in my first comment here).

We are all in agreement that the banking crisis that began in 2008 still hasn’t ended, although its nature and location has changed. Did you read that Baseline Scenario post I linked to above?

I take your point that your view we “should” let banks go bust was not a case of economies as a “morality play”, sorry for the mistaken inference, but I think you’re mistaken to think that supporting bust banks is depressing growth, relative to what a full blown banking collapse does to growth. I don’t think the US letting its small local retail banks go under is quite the right comparator for the Spanish letting their banking system collapse. I’ve also seen a few arguments recently that Japan’s “lost decade” isn’t looking so bad now, compared to what we might be in for, so maybe Japan is not the warning you think it is.

I guess by arguing for bailing out banks, I do mean with tax-payer money, which means more sovereign debt … although I think that the ECB is going to have to monetize sovereign debt so really I’m thinking of the ECB recapitalising the banking system. And whilst it might look like what I propose involves more sovereign debt, I think the alternative – let the banks go under – entails a deeper recession, lower tax revenues, higher unemployment and so more sovereign debt, so relative to that counterfactual, its not clear bailing out the banks means more sovereign debt.

34. Frances_coppola


Sovereign debt is part of the crisis. I have never said it wasn’t. I was drawing attention to the banking crisis.

I do not agree that it is possible to recapitalise banks without increasing sovereign debt in some form. Recapitalisation may come directly from sovereigns or it may come via the ECB, but in the end taxpayers will pay for it – and not the taxpayers of the country with the insolvent banks, either. Recapitalisation via the ECB would mean German taxpayers paying to bail out Spanish and French banks. Which is of course why the German government and the Bundesbank are adamantly opposed to such a scheme.

I’m astounded that you regard the failure of hundreds of retail banks in the US as of less significance than the failure of Spain’s second-tier banking mutuals, which is mainly what we are talking about. The US offers a blueprint for resolution of banks of that size which in my view Spain would do well to follow. I see no reason to bail them out – they are not SIFIs and do not represent a risk to the international financial system. Why on earth German taxpayers should rescue Spanish mutuals that took on too much property-related debt is frankly beyond me.

Evidence from Japan that keeping insolvent banks on liquidity life support depresses growth is here: http://www.fdic.gov/bank/analytical/cfr/2012/wp2012/CFR_WP_2012_02.pdf

They either need to have injections of capital large enough to make them solvent – and as I’ve said, that would be a significant cost to the taxpayers of OTHER COUNTRIES – or they need to be wound up.

35. Luis Enrique


you wrote: “What happened in 2008 was not a sovereign debt crisis. Nor was it a currency crisis. It was a banking collapse.” which prompted me to try to argue it was a sovereign debt crisis and a banking collapse, which I thought was contrary to your position, but now you write “sovereign debt is part of the crisis” so perhaps you agree with my and after all.

I’m not sure you’ve quite taken on board my argument that the other options – including letting the banks go under – also entail taking on more sovereign debt, but for different reasons.

Well, perhaps local US retail banks are more comparable to the Spanish Cajas than I realise, but I am under the impression that the Spanish banking crisis affects a much greater part of the system than merely a few local banks that could go under without too many adverse consequences. Mr Rajoy think the country will fall if its banks are allowed to go under.

I’m not sure what I had in mind – the ECB indirectly recapitalising banks – amounts to the German taxpayer having to do it, but in any case, the reason why they might want to do it is to avoid things going from bad to worse in the Eurozone (see Baseline Scenario).

that paper suggests insufficient recapitalisations are bad for growth – alright, as you say, either do it properly or wind them up. But right now with the Spanish economy is tatters, maybe winding them all up right now isn’t so clever. I don’t see that paper compare bailouts against what happens if you let lots of banks fail at once in the midst of what’s already an economic disaster.

36. Luis Enrique

I read here that Bankia is Spain’s “third largest bank”. So maybe small local US banks aren’t the best comparator after all. [that article also does a nice job of describing the risks Spain is taking trying to bail out the banks itself with its own debt]

@ Luis

Spain is mostly in trouble because of it’s unwillingness to come clean about it’s bad debts privately held, in banks and otherwise….and the implicit idea that the government will step in and bail those banks out – which it doesn’t have the financial firepower to do. It’s the assumption everyone has made. Try finding an article whic discusses Spain letting it’s Cajas fail – I can’t.

Frankly its a pretty good assumption, given how politically intertwined with the government the Cajas are. Imagine though they did let the banks fail, but offered some form of deposit guarantee. Government bond yields would come crashing lower as there would be the threat of bailouts of approx 280bn EUR hanging over them.

Spain probably could have avoided a sovereign debt crisis, but they’ve done an Ireland and converted a banking crisis to a sovereign one.

38. Luis Enrique


I seem to recall people talking about Spain being a worry before people were thinking about its banks

Over 500 European banks had their hands out when Draghi offered over a trillion euros in 3-year loans at next to zero interest. If that’s an indicator of how bad it is, can 500 banks be rescued? No way.


And what did the banks do with the trillion euros? Did they invest it in real economies?

Err no. They propped up their balance sheets and bought sovereign debt in the peripheral states, thus keeping the whole ghost ship afloat.

So the ECB bails out the banks who then bail out the governments and neither can afford to be caught holding the parcel when the music stops.

So, the band plays on, the troubled economies don’t grow and the inevitable crash becomes ever worse.

40. Frances_coppola


What happened in 2008 WAS a banking crisis, not a sovereign debt or currency crisis. Lehman, remember?

The US DID allow lots of retail banks to fail in the middle of an economic disaster, and it is now on the road to recovery. Not a bad example to follow, I would say. The main difference is the political entanglement of the Spanish regions and the Cajas – that’s why they don’t want them to fail, as Tyler says.

You really can’t use Bankia to prove that the problem lies with large Spanish banks. Bankia was created by the Spanish government in December 2010 by merging seven regional savings banks. The idea seemed to be that if you glued together seven insolvent entities the result would be a solvent bank. And a successful IPO was done last year on the back of this. I think the investors who bought into that may have grounds for legal action, since it now seems that at
least some of the merged institutions overvalued their property assets.


There is zero evidence that Germany wants to have anything to do with rescuing Spanish banks, and considerable evidence to the contrary – not least because France is next in line for bank recapitalisation. Sarkozy tried to get Germany to agree to French bank recapitalisation via the ECB and was rebuffed. Hollande is openly supporting ECB bailout of Spanish banks and I have no doubt that is an “opener” to allow him later to push for ECB recapitalisation of French banks too. Germany won’t want to be on the hook for that – they have enough problems with their own large banks.

41. Richard W

I also like the stories charts tell. However, there is always the danger with charts of confusing correlation with causation. The full scale banking crisis as opposed to the localised one was caused by the collapse in NGDP in the affected areas. Collapse in NGDP = collapse in asset prices = financial distress for holders of assets = banking crisis. Since that is the chronology of what actually happened one can’t solve any other problems until NGDP returns to its previous path and level. With no return there will be ongoing banking distress, higher than natural unemployment and people will just feel generally poorer, because they are poorer.

NGDP is not determined by banks or firms, it is determined by the central bank. In 2007/08, we had a monumental central bank screw up and we are still paying the price. The Fed, ECB and BoE were the guilty parties who allowed NGDP to fall off a cliff and caused the subseqent banking crisis. Remember the ECB raising rates in July 2008, possibly the dumbest move in the history of the world. The BoE were still fiddling around cutting rates marginally into 2009 when the economy had been falling off a cliff for the previous six months. King’s comedy of errors around Northern Rock will provide historians with ample material to rubbish his reputation, but it caused catastrophic uncertainty and loss of coinfidence in the UK interbank repo market. Bernanke wrote papers advising the Japanese and when it came to the crunch he forgot everything he used to believe. They all screwed up because they overeacted to a blip in commodity prices during 2007/08. The BoE had allowed UK NGDP to grow too fast in 2006 and totally overeacted when the predictable price inflation hit prices in early 2008.

The recession and banking crisis was a monetary phenomenon and that means it was caused by the respective monetary authorities. No wonder they are so resistant to any enquiry, they are guilty as hell. Easier to just have the banks as pantomime villains.

42. Luis Enrique


Oh right, I wasnt sure what you meant by “what happened in 2008” and in the context of an article about Europe I assumed you meant the onset of the Euro crisis.

43. Luis Enrique


The point about Bankia is that if you compare the proportion of the Spanish banking system that is in trouble, however constituted, it is far larger than the proportion of the US banking system represented by those small retail banks. Don’t you agree that if the Spanish let all it’s bust banks go under, a very large proportion of its entire system would be gone? I don’t know if Santander is solvent, I assume it is.

44. Luis Enrique

here’s another chart that tells a story


now, take that situation and add the policy of liquidating a big chunk of the country’s banks.

45. Frances_coppola


Liquidating insolvent banks does not of itself cause economic disaster. The US’s economic disaster was happening ANYWAY – it is that that caused their banks to fail, not the other way round. If you look at how FDIC resolves bank failures it is amazingly streamlined and the majority continue trading almost uninterrupted under new management. Some measure of protection for depositors and for payments is clearly required, but I really don’t think there is reason to panic about failure of small or even not-so-small retail banks. I think there is much more reason to panic about insolvency of the Spanish sovereign if it is forced to bail out its banks.

Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Five charts that tell the European disaster story http://t.co/rlURvLLw

  2. Jason Brickley

    Five charts that tell the European disaster story http://t.co/RnL8QcZO

  3. sunny hundal

    Five charts that tell the European disaster story http://t.co/xmUmKwMI "what's STILL going on is a banking collapse"

  4. Denis donovan

    Five charts that tell the European disaster story http://t.co/xmUmKwMI "what's STILL going on is a banking collapse"

  5. Glenn Williams

    Five charts that tell the European disaster story http://t.co/rlURvLLw

  6. Thomas R Bissell III

    Five charts that tell the European disaster story | Liberal Conspiracy http://t.co/gNqKAdhU via @libcon

  7. Seán Ó Hare

    RT @sunny_hundal: Five charts that tell the European disaster story http://t.co/2XkJWPcW < OMG a LiberalConspiracy post I can agree with!

  8. Breakfinder General

    Five charts that tell the European disaster story http://t.co/xmUmKwMI "what's STILL going on is a banking collapse"

  9. Alex Gordon

    5 charts that tell European disaster story http://t.co/stI92eK1 For them as thinks Greece is 'sovereign debt crisis'. Get yerselves learned

  10. afghansbz7

    Five charts that tell the European disaster story http://t.co/EMlYZtnn

  11. Finghín Kelly

    5 charts that tell European disaster story http://t.co/stI92eK1 For them as thinks Greece is 'sovereign debt crisis'. Get yerselves learned

  12. Simon A. Dyer

    Five charts that tell the European disaster story http://t.co/xmUmKwMI "what's STILL going on is a banking collapse"

  13. Paul CB

    Five charts: Liberal Conspiracy http://t.co/9XoL11TM via @libcon About right: not enough on over-borrowing/taxing limiting policy response.

  14. alifom4

    Five charts that tell the European disaster story http://t.co/4FBU5UHL

  15. leftlinks

    Liberal Conspiracy – Five charts that tell the European disaster story http://t.co/Br7Ovd6U

  16. Marcus Chown

    Five charts that tell the European disaster story http://t.co/xmUmKwMI "what's STILL going on is a banking collapse"

  17. Charlie Wheeler

    Five charts that tell the European disaster story http://t.co/xmUmKwMI "what's STILL going on is a banking collapse"

  18. Charlie Wheeler

    'What happened in 2008 was not a sovereign debt crisis. Nor was it a currency crisis. It was a banking collapse.' http://t.co/qCYD14rj

  19. Mr Creek

    Five charts that tell the European disaster story http://t.co/rlURvLLw

  20. andrew

    Five charts that tell the European disaster story | Liberal Conspiracy: As you all know by now, I like charts. T… http://t.co/dEpP8kDr

  21. Noxi

    RT @libcon: Five charts that tell the European disaster story http://t.co/GKI9l29w

  22. BevR

    Five charts that tell the European disaster story | Liberal Conspiracy http://t.co/h3WtVKRh via @libcon

  23. Frances Coppola

    My European Disaster Story post at Liberal Conspiracy. With an unusually intelligent debate in the comments. Do read. http://t.co/XpvOKdjK

  24. Tim Coldwell

    My European Disaster Story post at Liberal Conspiracy. With an unusually intelligent debate in the comments. Do read. http://t.co/XpvOKdjK

  25. Allan Draycott

    My European Disaster Story post at Liberal Conspiracy. With an unusually intelligent debate in the comments. Do read. http://t.co/XpvOKdjK

  26. Effie Deans

    My European Disaster Story post at Liberal Conspiracy. With an unusually intelligent debate in the comments. Do read. http://t.co/XpvOKdjK

  27. paul smith

    Five charts that tell the European disaster story | Liberal Conspiracy http://t.co/yIUJ31YG via @libcon #otb #ows #indignado #bankster #euro

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