Thursday, 29 July 2010

Its getting the patient off life support that's the tricky part

Putting a patient on life support be it a ventilator or cardiac support is a well established and generally successful medical procedure. The reverse operation is not. I know how difficult it can be to get premature babies off ventilator support to breathe by themselves. If it works the prognosis is good but if the patient has to go back on the ventilator the prognosis worsens.

As it is with humans in failing health so it is with Euroland banks. In Greece these are currently kept afloat by the ECB buying or lending to Greece against roughly 140 bn € of Greek bonds as collateral. That's around twice BP's highest estimated liability in the Gulf. BP also has lots of assets that can and some will be sold at decent prices on the open market worldwide something Greece does not have. In Spain banks  have a huge exposure of one trillion private debt secured on one asset class property.

These countries banks have been rolling over their funding in the market at three month maturity but when the countries themselves have to go to those same markets for money there just won't be enough to go round and the price, i.e. the interest rates, of money will rise dramatically and some patients, sorry banks will die or go back on ECB life support again. Its called crowding out. It has happened many times before in financial markets and its about to happen again in Euroland. Step forward the King Canutes of the EU!

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