Eurozone: Problems continue to fester behind the “everything is fixed” facade

Contrary to recent popular opinion, the Eurozone crisis remains far from resolved. It may well be that we can get through 2013 without a flare up in the regions sovereign debt crisis, but the problems continue to fester behind the “everything is now fixed” facade.

Take Spain for example, in November nonperforming loans at Spanish banks rose to a record high of €192 billion, which represents 11.4% of all outstanding loans and is almost 20% of GDP. A chart of these bad loans shows them rising at an almost exponential rate, and they are sure to increase further as unemployment (already 60% for those under 25) is expected to continue rising.

As Fathom Research noted yesterday, “Bad bank assets today can be seen as the sovereign’s liabilities of tomorrow. Recent evidence in Spain gives credence to this view. Over the past few years, the government’s borrowing costs have tended to rise in sync with the perceived safety of its domestic banking system, and vice-versa. This is a pattern that can be seen across the Euro Area. In Ireland, an insolvent banking system ended up bankrupting the sovereign.”

The recent spell of calm in the Eurozone came courtesy of ECB President Mario Draghi’s pledge of “unlimited” purchases of government bonds via its OMT (Outright Monetary Transactions) programme. However, since it was announced last September, politicians from the ‘core’ northern economies have backtracked. They now say that legacy debt should not be covered by the ECB and that the cost of any bank bailout should be borne by the host sovereign.

If, or rather when, the Spanish banks are forced to ask for another €40 billion (or more) bailout we can expect the debt crisis to resume with full force.

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