The Pain in Spain Drags Europe Down the Drain - Part 2
So how will the pain in Spain drag Europe down the drain?
We focused on the pain in Spain last time in Part 1. Now in part 2 we'll see just why what's happening now in Spain is only the opening chapter in an economic drama that may drag the rest of Europe into a prolonged recession - or worse.
First of all, all the evidence points to not only a severe recession in Spain, but to what really must be called a depression. If almost 50% of your young working age citizens can't find a job, what would you call it?
Anyway, to understand why the rest of Europe may be dragged down the drain, let's go back to all that debt that the Spanish government ran up for years. All that debt piled up because the Spanish government didn't have enough revenue to pay for all the entitlements they provided and promised to their citizens. So they had to borrow money to pay for the entitlements. Who loaned them all that money? Banks. Spanish banks and other banks. Most of the other banks who loaned the Spanish government money were other European banks.
Oh, before we forget, remember that the more they borrowed, the more entitlements they provided and promised. In fact, as long as they could borrow money, they kept doing it. Yes, I realize it's ridiculous to think that responsible bankers would lend money to a government that operated this way. But they did.
Now doesn't it seem that the bankers here were being irresponsible? The answer would be yes - with one qualification. The fact is, these bankers claimed that a sovereign government would not stop paying interest on what they borrowed. They had this theory that governments simply could not default on their bonds. Why did they think this? That's a good question. There have been plenty of examples throughout history of governments defaulting on their bonds. In spite of that, this idea that a government won't default on its bonds keeps popping up and banks keep lending money to governments based on that theory.
Anyway, remember that we said that all the other governments in Europe were borrowing money so they could provide entitlements to their citizens too. So that means that the European banks were loaning money to all the governments in Europe, and doing it under that theory that none of these governments would ever default because of that theory that governments don't default on their bonds - again, in spite of all the historical evidence that governments did in fact default on their bonds throughout history.
This time around, the claim was made that governments can't default in our modern era. Why? You can bet various reasons have been given, just like the last time this theory popped up - when U.S. banks invested heavily in Latin American bonds believing at the time that such bonds could not default. Of course they did, creating a huge banking crisis. That one was known as the "S & L" (Savings and Loan) crisis.
So is there something special about this time around that will prevent another banking crisis? What do you think? I know this sounds ridiculous - even crazy - but that's just what's been going on.
The massive amount of borrowing these governments did to give their citizens entitlements so that the politicians could be elected and re-elected has now gotten so large that the governments can't afford the interest payments on all that debt. The reason that Ireland and Greece didn't drag Europe down the drain was because the amount of money they owed to the banks in Europe - while it wasn't chump change - was small enough so that the banks weren't in danger of collapsing. But Spain is another story. They owe lots of money to the European banks.
Now, to sum up, we've seen what all the pain in Spain is about - austerity measures being enforced by the Spanish government in response to demands from the EU.
Why does the Spanish government enforce these measures when its own citizens are in pain - even expressing their pain by demonstrating and rioting? Because the governments want and need to borrow more money to pay the interest on the money they already owe.
Who will lend them the money? The European banks.These are the European banks who loaned money to already heavily indebted European governments to begin with because they believe that these government can never default on their debt.
But if the Spanish government "can't" default on its debt, why should it impose austerity measures on its citizens? Because if it doesn't do what the EU says, they won't be able to borrow more money. And if the Spanish government can't borrow more money, it will have thereby defaulted on its debt - which the European banks said was not possible. Isn't this staring to make absolutely no sense?
(By the way, if you're ticked off that these bankers are being bailed out all the time for this sort of awful decision-making, who's going to hold them accountable? The irresponsible politicians who started the ball rolling in the first place? Really?)
So, if all the other European countries borrowed more than they could afford, and all the European banks hold all this debt, and the other European countries - just like Spain - can't afford to pay the interest on all that debt, leading to possibly all of them defaulting on that debt, can you see how the pain in Spain drags Europe down the drain?
We focused on the pain in Spain last time in Part 1. Now in part 2 we'll see just why what's happening now in Spain is only the opening chapter in an economic drama that may drag the rest of Europe into a prolonged recession - or worse.
First of all, all the evidence points to not only a severe recession in Spain, but to what really must be called a depression. If almost 50% of your young working age citizens can't find a job, what would you call it?
Anyway, to understand why the rest of Europe may be dragged down the drain, let's go back to all that debt that the Spanish government ran up for years. All that debt piled up because the Spanish government didn't have enough revenue to pay for all the entitlements they provided and promised to their citizens. So they had to borrow money to pay for the entitlements. Who loaned them all that money? Banks. Spanish banks and other banks. Most of the other banks who loaned the Spanish government money were other European banks.
Oh, before we forget, remember that the more they borrowed, the more entitlements they provided and promised. In fact, as long as they could borrow money, they kept doing it. Yes, I realize it's ridiculous to think that responsible bankers would lend money to a government that operated this way. But they did.
Now doesn't it seem that the bankers here were being irresponsible? The answer would be yes - with one qualification. The fact is, these bankers claimed that a sovereign government would not stop paying interest on what they borrowed. They had this theory that governments simply could not default on their bonds. Why did they think this? That's a good question. There have been plenty of examples throughout history of governments defaulting on their bonds. In spite of that, this idea that a government won't default on its bonds keeps popping up and banks keep lending money to governments based on that theory.
Anyway, remember that we said that all the other governments in Europe were borrowing money so they could provide entitlements to their citizens too. So that means that the European banks were loaning money to all the governments in Europe, and doing it under that theory that none of these governments would ever default because of that theory that governments don't default on their bonds - again, in spite of all the historical evidence that governments did in fact default on their bonds throughout history.
This time around, the claim was made that governments can't default in our modern era. Why? You can bet various reasons have been given, just like the last time this theory popped up - when U.S. banks invested heavily in Latin American bonds believing at the time that such bonds could not default. Of course they did, creating a huge banking crisis. That one was known as the "S & L" (Savings and Loan) crisis.
So is there something special about this time around that will prevent another banking crisis? What do you think? I know this sounds ridiculous - even crazy - but that's just what's been going on.
The massive amount of borrowing these governments did to give their citizens entitlements so that the politicians could be elected and re-elected has now gotten so large that the governments can't afford the interest payments on all that debt. The reason that Ireland and Greece didn't drag Europe down the drain was because the amount of money they owed to the banks in Europe - while it wasn't chump change - was small enough so that the banks weren't in danger of collapsing. But Spain is another story. They owe lots of money to the European banks.
Now, to sum up, we've seen what all the pain in Spain is about - austerity measures being enforced by the Spanish government in response to demands from the EU.
Why does the Spanish government enforce these measures when its own citizens are in pain - even expressing their pain by demonstrating and rioting? Because the governments want and need to borrow more money to pay the interest on the money they already owe.
Who will lend them the money? The European banks.These are the European banks who loaned money to already heavily indebted European governments to begin with because they believe that these government can never default on their debt.
But if the Spanish government "can't" default on its debt, why should it impose austerity measures on its citizens? Because if it doesn't do what the EU says, they won't be able to borrow more money. And if the Spanish government can't borrow more money, it will have thereby defaulted on its debt - which the European banks said was not possible. Isn't this staring to make absolutely no sense?
(By the way, if you're ticked off that these bankers are being bailed out all the time for this sort of awful decision-making, who's going to hold them accountable? The irresponsible politicians who started the ball rolling in the first place? Really?)
So, if all the other European countries borrowed more than they could afford, and all the European banks hold all this debt, and the other European countries - just like Spain - can't afford to pay the interest on all that debt, leading to possibly all of them defaulting on that debt, can you see how the pain in Spain drags Europe down the drain?
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