Monday, September 30, 2013

Bank Bailouts Are Healthy And Necessary

As readers know, I am a Tea Party libertarian, at least up to a point. I get off the bus when it comes to monetary and financial policy. I like having a central bank, a lender of last resort, and a financial safety net. Why? Because I don't want the American people to experience another Depression.

There is strong sentiment on the Right (and the Left) to break up the big banks, and to prohibit future bank bailouts. Indeed, there is a push for a Constitutional Amendment to outlaw future financial bailouts (I haven't seen the wording). The view is that, had Paulson and Bernanke allowed Wall Street go bankrupt in October of 2008, excesses would have been squeezed out, and market discipline would have been restored. That, of course, is Mellonism.

Please note that the Great Recession was not caused by the existence of the financial safety net: it was cause by Paulson's inexplicable withdrawal of the net under Lehman. The past five years would have been quite different if the safety net did not have a Lehman-sized hole in it.

Breaking up the big banks is a stupid idea that goes in the wrong direction. Most countries have a few very large banks that are TBTF. The US is unique in that, because of prairie populism, it has thousands of small regional banks that are not TBTF, and a handful of big banks that need to be TBTF. The best run banking systems (Canada, Australia) consist of a few, well-regulated national banks that are subject to strict regulation and which are not permitted to default upon their senior debt or uninsured deposits. That is called "financial stability", which is a predicate for prosperity. (Note also that the "securities firm" is also a dangerous American invention.)

The US experimented with a fragmented banking system with no safety net for 150 years until 1934. Financial stability was not a hallmark of those 15 decades. There were decennial banking panics and decennial depressions, culminating in the Big One. Go back and read an account of the mid-1890s; it wasn't pretty unless you were rich.

Financial capitalism is prone to cycles and panics, as Hyman Minsky has shown. There is a constant repeating of the credit cycle: prosperity, overconfidence, overleverage, panic, collapse, depression, recovery. This cycle may be prophylactic in some Darwinian sense, but it creates a lot of unnecessary suffering, as well as undesirable political consequences. It cannot be legislated out of existence, and it cannot be prevented by repetition.

Market discipline doesn't work because the credit markets have a memory of at most two years. Markets do not learn. How many traders at Goldman have read Friedman's monetary history of the US? How about none. How many traders at Goldman remember LTCM? A handful at most. The Masters of the Universe tend to be about 30 years old and are lucky to remember who Bill Clinton was.

The credit market in general and the banking system in particular need to be protected from themselves. That requires three pillars:
1. High capital requirements for the systemically-significant.
2. Intrusive prudential regulation with an emphasis on risk management and risk tolerance. (London Whales should be punished.)
3. A reliable safety net, such that panics do not occur. That means no more Lehmans, not no more bailouts. It means financial stability.

Let's not relearn the lessons of the 1930s.

Sunday, September 29, 2013

Investors Should Ignore The Coming "Debt Crisis"

Thesis: Investors should ignore the coming budget crisis, and leave their asset allocations unchanged.*

The capital markets are now facing the risk that without a budget, the federal government will “shut down” on Tuesday, and that without an increase in the debt ceiling, the US will default on its debt later in the month. I am in no position to handicap either event, although the odds of  shutdown are much greater than of a default.

My advice to investors is to ignore this entire operetta. Whatever economic impact it has will be brief and fleeting. A shutdown is pure theater, since it has very little economic impact. When the government shut down the last time (the winter of 1995-96), the economy kept growing, and the stock market did well. A shutdown is an economic nonevent.

The debt ceiling is a much more serious matter. If the ceiling is reached, and if the Treasury has no more expediencies (or chooses not to avail itself of more expediencies), and if the president allows a Treasury default, then there would be a temporary disruption in the credit market, causing a temporary decline in the bond and stock markets.

However, it should be emphasized that the Treasury/OMB can prioritize debt payments above other spending, and it can continue to roll maturing debt; it just can’t issue new debt above the ceiling. The monthly deficit varies widely but is now averaging $100B, versus around $300B of spending. So about ¼ to ⅓ of monthly spending would need to be postponed or offset with asset sales or other maneuvers. That could be done if the Administration chose to pursue that avenue, although it has said that it won’t.

It may be that both sides will be so dug in that neither will blink, and a default will occur. This is unlikely since Speaker Boehner has said that default is not an option, but his caucus may decide otherwise (or may depose him). A default would be a buying opportunity for both bonds and stocks because it would represent a screw-up, not a real economic problem. (Think of Y2K or 9/11.)

Insofar as a default causes a loss of market confidence that shows up in the capital markets or in the real economy, the Fed can offset the impact with words or actions. In extremis, the Fed can control the nominal economy. Once the default is cleared up, as it would be, bond and stock valuation will return to the fundamentals (which include the fact that the deficit is rapidly declining).

Note that, if the Treasury chooses to assign a low priority to the debt and does choose to default, it would only affect debt maturing during the period affected, not all federal debt. Certain securities would come due and be defaulted upon. Such securities will be “in default” in a technical sense, but are guaranteed a 100% recovery plus interest. The debt is neither excused nor extinguished. In the last ceiling scare, Moody’s put only those affected maturities under review, and indicated that a downgrade would be modest and temporary, as expected loss remained zero. Should such securities decline in value, they would represent a minor buying opportunity.

Both rating agencies have said that the recurring default risk caused by the ceiling is a credit negative. This was one of the reasons for S&P’s downgrade of the US from AAA to AA-. Moody’s has maintained its Aaa, with a stable outlook, but isn’t happy with the prospects of a default. They might react in some way to a default, but in respect of expected loss there is no reason for doing so.

The creditworthiness of the US does not hang by a thread in John Boehner’s fingers. The US is not Spain. The US, given the current trajectory of the deficit, remains a solid AAA in my opinion. I don’t see how any corporate or structured security could be rated higher than the US. The country’s debt burden is quite manageable, as evidenced by the extremely low yields on its obligations. CBO projects that federal debt to GDP will peak in a year or so, and then begin a steady decline for the rest of the decade: no fiscal crisis.

If a default occurs and is disruptive, the Fed will respond which might even spark a rally in stocks and bonds. The fundamentals will be unchanged.

The real challenge to the stock market today is the slowing economy, which may begin to appear in corporate earnings. Keep your eye on nominal growth. That’s the real threat.
*Note that I am a blogger and not a registered investment advisor. Do not rely upon my opinions.

Tuesday, September 24, 2013

QE Verdict After Five Years: A Failure

It is now five years since the Lehman crash and the commencement of the Fed’s bond-buying policy known as QE. Since Lehman, the Fed has bought $2.8T trillion of bonds from banks, quadrupling its balance sheet from $800B to $3.6T.

Today’s topic is: How successful has QE been in delivering strong money growth, sustained economic growth, full employment, and 2.0-2.5% inflation? Answer: unsuccesful. Today, the Fed has zero credibility when it comes to market confidence in its ability and commitment to fulfill its twin mandates.

Here is the current data (percent change from year ago):

M1: 7.0%
M2: 6.6%
M3: 4.5%
M4: 3.6%
Core inflation: 1.2%
Nominal GDP: 3.1%
Real GDP: 1.6%
Unemployment rate: 7.3%

We are looking at an economy that has been stuck in second gear for four years, and employment indices that have yet to return to precrash levels. Five years after Lehman, millions of people are unnecessarily out of work and out of the workforce. 

This is because the Fed has not pursued a consistent policy of monetary expansion since 2008. The trillions that the Fed has supposedly “pumped into the economy” are nowhere to be found; they are sitting on deposit at the Fed as sterile and useless excess reserves. They are not "in the economy" and they have had no impact on money growth, inflation expectations or economic growth.

In the 1981-82 recession, Volcker grew M2 by double-digits for a year, and got things moving. Greenspan did the same thing during the 2001-02 recession, and again got things moving. Bernanke did the same thing in in 2009 and again 2011, but stopped in mid-2012, allowing money growth to fall to its current anemic levels.

Five years on, we have persistently high unemployment and very weak growth. Nominal growth at 3.1% is far too low to bring down unemployment, and risks another recession. A deflationary recession at this point in the cycle would be disastrous, and would require heroic policies to reverse.

Bernanke’s half-hearted policies have failed to raise inflation expectations. The fact that expectations remain “anchored” at a low level is a sign of failure, not success. The real funds rate needs to be substantially lower than the current minus 1%. The best way to raise inflation expectations is to explicitly target and deliver 3-4% inflation.

The Fed’s talk of tapering QE was a major policy mistake. Not because QE has worked, but because tapering signals a surrender in terms of the Fed’s commitment to fulfilling its mandate. It signals that the FOMC is OK with high unemployment and low inflation, and that that the Fed’s mandates are aspirational “goals”, which it doesn’t really need to achieve.

The  failure of QE necessitates a bolder policy, not a more timid one. Wars are not won by retreat. The Fed needs to decisively change its focus from inputs (buying $X amount of bonds each month) to economic results: money growth, inflation and nominal growth. This will require a program of shock-and awe in order to make a decisive break in inflation expectations and market behavior:

1. Target 10% money growth, 3-4% inflation, and 6-7% nominal growth.
2. Stop paying interest on excess reserves in order to encourage banks to put them to use in the economy.
3. Double the size of QE and make it open-ended until unemployment returns to a normal level, say 5%.
3. Add to the QE buy-list a trade-weighted basket of foreign government bonds, and physical gold.
4. Commit to raise the price of gold if M2 proves sticky.
5. Permanently redefine “price stability” as 3-4% inflation.

The Fed needs to restore its credibility by meeting its mandates, instead of half-heartedly trying to meet its mandates. There are no points for effort in this exercise. This is a very serious business, given the current level of unemployment and the dismal job prospects for young people.

Monday, September 16, 2013

The Next Black Swans Are Visible

Everyone is now looking under his bed for the next bubble or black swan. Some pundits are pointing to the revival of the market for risky corporate bonds. They worry what will happen when there are defaults. Well I can tell you what will happen when there are defaults: credit spreads will widen and speculators (the people who buy speculative-grade bonds) will suffer MTM losses. Big deal; this happens all the time. No one dies from it. And yes, speculative-grade bonds are speculative.

What people die from is huge positions in low-risk instruments that overnight become toxic. That’s what happened in the subprime fiasco. Here are the criteria for such an event:

Before the event:
1. The security is seen as low risk. It is rated investment grade and is thus eligible for fiduciaries to buy.
2. The security attracts a low capital coefficient under the bank capital regime.
3. The accounting treatment is to carry the security at par.
4. Systemic exposure to the security is massive.

The event:
1. The security is downgraded to speculative grade, forcing fiduciaries to sell.
2. The bank capital regime now requires a higher capital coefficient.
3. The accounting treatment changes from cost to market (MTM).
4. Large MTM losses result, rendering the most exposed players insolvent.

What asset class meets these criteria: Club Med government bonds. In declining order of risk:
1. Spain (Baa3/Negative outlook)
2. Italy (Baa2/Negative outlook)
3. France (Aa1/Negative outlook)

I include France because it has the furthest to fall, like super-senior CDOs. Today French government bonds are a risk-free security. High ratings, zero capital coefficient, carried at par. Imagine if those factors should change: a lower rating, a higher capital coefficient, marked to market. Spain may be the next Lehman, but France could be the next WW1. If French bonds begin to decline in value, there is almost nothing anyone can do about it (besides fiddle with the accounting). It would rip a huge hole in the European banking system which would be impossible to fill without high inflation.

So while we know that Spain is on a bad trajectory, we should worry that France may be too. Spain may be Lehman; but France is civilization as we know it. The next black swans are visible.

Sunday, September 15, 2013

The Intellectual Fallacy Of Central Bank Financial Strength

There is an article in this month’s ECB Bulletin titled “Central bank balance sheet expansion and financial strength in crisis times: the case of the Eurosystem”. It is an extraordinary display of cant, nonsense and false assertions; in fact, it is almost Orwellian, as in 1984. Please wade through the following excerpts, and then I will comment:

“The implementation of monetary policy is inevitably associated with financial risk because it involves the provision of central bank money against assets or collateral from private agents. If a central bank is perceived to be taking excessive risk, its credibility and the public’s perception of its ability to deliver on its mandate may be affected. 

"Both in normal and in crisis times, central banks must preserve their financial strength, which means that they must always have sufficient financial resources available over time to conduct monetary policy in an independent manner, and hence deliver their policy objectives in all circumstances.  What matters in ensuring the credibility of the central bank is its financial strength across time.

“The ECB treaty prohibits monetary financing. These provisions preclude the monetising of sovereign debt. Through promoting price stability in the long term, these provisions indirectly contribute to the financial health of the Eurosystem’s balance sheet.

“The central bank’s stand-alone financial strength reinforces credibility in its capacity to always deliver on its mandate while avoiding exposure to political pressures. This helps to anchor expectations among the general public and financial market participants that the central bank is in a position to effectively deliver on its mandate and that its monetary policy decisions will not be unduly constrained by concerns about financial resources.”

--ECB Monthly Bulletin, September 2013

Let’s parse these words. Note that the tone is didactic, from “on high”, as opposed to scientific. No evidence is adduced in support of the following four palpably false hypotheses:

1. To maintain confidence and credibility, central banks must maintain a high level of standalone financial strength.

2. Central banks must always have sufficient financial resources available over time to conduct monetary policy in an independent manner, and hence deliver their policy objectives in all circumstances.  

3. The ECB’s unwillingness to engage in QE (“monetary financing”) contributes to the financial health of the Eurosystem’s balance sheet.

4. The ECB’s standalone financial strength helps to anchor expectations that monetary policy will not be constrained by concerns about financial resources.

In a nutshell: A principal policy objective of a fiat money central bank should be its standalone financial strength.

Where did this shibboleth come from? Please name the economist, in any country. This bogus platitude can be found in no economics textbook written since the end of the gold standard. It was pulled out of thin air, and what I have called “Commercial Bank Thought”, the earnest belief system of those who think that because they understand commercial banking, they must be experts at central banking. One can work for a commercial bank for decades and never learn anything about monetary policy--in fact the correlation is negative. Commercial banking is about making and collecting loans. Central banking is about delivering growth with moderate inflation. Those two Venn Diagrams don’t touch. Commercial banks (private sector, profit-seeking enterprises) inadvertently, unintentionally and unknowingly act as vectors of central bank policy.

Now, I will concede that when the Fed is asked to lend dollars to foreign central banks, it must consider their ability to pay the dollars back. But normally, central banks don’t borrow from each other. It’s a tangential activity. What central banks actually do is manage the money supply by adding or withdrawing liquidity from the banking system. That means either buying bonds with newly printed currency, or selling bonds from  portfolio.

The only actors who have credit exposure to the central bank are commercial banks who keep their liquidity reserves there. Do they worry about the Fed’s standalone financial strength? No. Here’s the crucial point: the reason why JP Morgan does not have a team of analysts running the numbers on the NY Fed (where it has a lot of money on deposit) is because the NY Fed prints dollars. The NY Fed can’t run out of dollars.

Now let’s turn to other holders of dollar claims, such as the People’s Bank of China. Does the PBoC have analysts studying the Fed’s balance sheet? No, because the PBoC knows that the Fed prints dollars just as it prints RMB. There is no credit risk associated with its claims on the Fed. (The Treasury, yes, but the Fed, no.)

Bogus hypothesis: “Central banks must always have sufficient financial resources available over time to conduct monetary policy.” What does this mean? When it comes to buying things, they print money, so that is not a constraint. Now they do have to sell assets from time to time to mop up liquidity. What if they run out of bonds to sell? Then they can sell their own bonds. Not only does a fiat money central bank not require capital, it doesn’t require assets, since it can issue its own bonds.

Bogus hypothesis: “The ECB’s unwillingness to engage in QE contributes to the financial health of the Eurosystem’s balance sheet.” What the ECB is saying is that, because it won’t buy Club Med government bonds, it is maintaining the euro’s credibility by protecting it from Club Med government credit risk. The euro is backed by good Nordic assets, not dodgy Latin assets. The credibility of the euro is supported by the market’s confidence that the ECB can survive a collapse of Southern Europe. Indeed, the credibility of the euro may require the collapse of Southern Europe, which is a small price to pay for credibility.

I recently suggested that Draghi is a hired gun. His employment contract specifies price stability, and that’s what he’s delivering. I have also said that Draghi has a secret contempt for the corrupt and profligate Italian political class, and that he hopes that Italy can be reformed by austerity and deflation. Maybe, who knows? He doesn't talk to me. But I would like to think that Draghi is a man of integrity and charity, and not merely a mercenary of the Bundesbank.

So I ask myself: Did Draghi read this article, or was it written by the Bundesbank and shoved into the Bulletin? Why did he allow it to be published, when he knows that it is utter nonsense?

At some point, when X+1 millions of Europeans are out of work, I would hope that Draghi will have the courage to be the St. Thomas Moore to Jens Weidmann's King Henry VIII and say: “I can no longer support your policies. I will do what I see fit, and it will be up to you to try to stop me”.

Friday, September 13, 2013

The Bundesbank's Target2 Exposures Are Manageable

AEP at the Telegraph has a thought-provoking column about the implications of eurozone exit for the Bundesbank’s (BB) balance sheet. The concern is that, when the peripheral central banks leave the eurozone, they will default on their outstanding balances to the Eurosystem, which are called Target2 Balances. The big Target2 debtors  are the Bank of Italy and the Bank of Spain. The ECB has compensated for the withdrawal of deposits from the Club Med banks by extending ~700B* of credit to the peripheral central banks, financed mainly by the BB.

An illustrative example: Barclay’s risk committee decides move to its euro clearing accounts from Santander to Deutsche (or from its Madrid branch to its Frankfurt branch). Santander borrows the money it owes to Barclay’s from the Bank of Spain, which in turn borrows from the BB. The BB then sells securities (Bunds) to German banks to fund its new loan to the Bank of Spain.  Two weeks later, Spain exits the eurozone, redenominates all of its financial liabilities into New Pesetas (including Target2 and its own bonds), and the Bank of Spain defaults on its loans from the BB. This makes the BB insolvent (on whose balance sheet these loans are booked), thus requiring a bailout from the hapless German taxpayer**. That’s the “crisis scenario”.

But I don’t think that the situation is really so dire. First of all, I believe that the BB’s exposure is to the eurosystem as a whole, and not to the Bank of Spain. So the default causes a solvency problem for the ESCB, not the BB. The ESCB is rendered insolvent, and would require a bailout from its owners (mainly, Germany). Minor difference, but a difference.

[Nomenclature alert: The ECB = the Federal Reserve Board; the European System of Central Banks = the Federal Reserve System; the Bundesbank = the NY Fed, which has the bulk of the system’s assets and liabilities on its balance sheet. Neither the FRB nor the ECB has a balance sheet. They are the boards of directors for their systems, which are made up of regional central banks. Most of the business conducted by the FRB and the ECB is handled by their “lead” banks, the NY Fed and the Bundesbank. The terms “the Fed” and “the ECB” are merely shorthand for the Eurosystem and the Federal Reserve System, banking groups with centralized governance but regional operating entities. The US system has the advantage that its regional central banks are not creatures of the 50 states, and not subject to local political influence. Bill Dudley (NYF) does not confer with Andrew Cuomo (NYS) on monetary policy.]

Furthermore, there is no need for a bailout of the ESCB or the BB. A bailout would be required if the eurosystem was on the dollar standard or the gold standard; in other words, if its liabilities were denominated in a currency that it can’t print. But the ECB prints euros, at no cost to anyone. A printing press doesn’t need capital because it prints its own money. The ECB would not require a bailout from anyone other than its own printing press. The eurozone’s money supply would not be affected, because the eurosystem’s assets have no impact on the monetary aggregates (money is claim on the banking system, not an asset of the central bank). It would be very different if the ECB were on gold, but it’s on Monopoly Money. If you or I were to xerox a euro note, it would be worthless. If the ECB does, it’s money. Photocopied euros are not legal tender. Printed euros are legal tender.

It is true that the eurozone as a consolidated entity would “lose” the amount of money defaulted upon by Spain, but that would have no economic, monetary or fiscal impact.

Take a look at the dollar zone: Imagine that Texas announced that it planned to secede, resulting in a global run on Texas banks. That would require the Dallas Fed to fund the banks by borrowing from the system (i.e., the NY Fed). Then, when Texas does secede from the US, it redenominates into its own domestic currency and defaults on its liabilities to the system. The Fed would lose the amount lent to the Dallas Fed, which would appear on the balance sheet of the NY Fed, as an accounting entry and nothing more. (I’m making the simplifying assumption that Texas nationalizes the Dallas Fed, and that its only members are Texas banks.) No one would worry about the solvency of the NY Fed, or of the FRB. The remaining reserve banks can still print dollars, and the ex-Texas money supply would be unaffected. (The status in the US of currency printed by the Dallas Fed would be problematic, as it would be in the case of Spain. Know your bank notes!)

This discussion harks back to prior conversations about the meaninglessness of central bank solvency, and the option of central bank debt forgiveness as a way of reducing government debt. The difference is that, instead of forgiveness on a planned and orderly basis, the default method would be a fait accompli, but otherwise similar.

I have undoubtedly made a few technical errors in my analysis, but I doubt that they would change my overall conclusion, which is that  Target2 balances don’t matter in economic, financial or fiscal terms.

However, T2 balances are a valid index of the market's assessment of redenomination risk, as the BIS has pointed out***.

Wednesday, September 11, 2013

Is Spain Systemically Important?

I spent my professional career in credit (1978-2007). I must have seen thousands of credits of every description, from Drexel to Mexico to Russia to Enron to Lehman to Greece. Over time, one develops instinctual, or gut, feel. Among the indices of a good credit are: good financial  disclosure; a useful website; a helpful CFO who builds trust and never lies; a CEO who understands credit (rare, outside of Wall Street). In non-anglophone countries: fluency in English and an English-language annual report, which are highly predictive: at least you are both on the same planet. Obviously, there are good credits that don’t meet this criteria (e.g., Norinchukin) and bad credits that do (certain large Swiss banks). But generally, transparency is a useful data point for creditworthiness.

Readers know that I tend to focus on the financial situation of the PIIGs and their financial systems as the source of the next global convulsion. To do this, I must rely on public data, as I am not a client of the NSA. For a highly-developed country such as the US, this not a challenge. The US is a cornucopia of public financial data, right down to the Fed’s weekly balance sheet and the Treasury’s monthly revenue and disbursements. An analyst of the US government and financial system is not handicapped by a lack of data. To a great extent this is also true of the rest of the anglosphere: English-speaking countries are serious about disclosure. After that, you fall off the Continental Shelf.

The ROW (or rest of world) views economic and financial data as national security secrets or, alternatively, window dressing (the national honor depends on it). There are three problems with ROW data: availability, usefulness, timeliness and reliability. There is a very distinct hierarchy in this regard, and to a great extent, I believe that it is credit related.

Let’s take the PIIGS. I know for a fact that Draghi is very concerned about the financial data emanating from the PIIGS. How do I know? Because he said so. The PIIGS generally rank low on the transparency scale (aside from anglophone Eire, which is a serious country). Greece has prosecuted state statisticians for telling the truth; no joke. Greek statistics fall into the category of Soviet data. They have zero information content, like those of Uzbekistan or North Korea. We can live with that because we know that Greece is a failed state, whose most recent president was a member of the Communist Party. (You have to love facts.)

We probably don’t need to care too much about the quality of Portuguese statistics; Portugal is not a “systemically important country”. When they go under, no one will notice. But Spain is a completely different story. Spain is systemically important, so the quality, availability, timeliness and reliability of its statistics are relevant to global financial stability, whether we like it or not.

I think that Spain is a systemically important  credit. I think we all agree about this, although I would challenge any of you to put a number on that datum. What is the size of Spain’s total (general) government debt and that of its banks? Good luck finding that data on an official website. I always begin with FRED, compiled by the St. Louis Fed, which is an enormous boon to economists everywhere. FRED is the Vatican of economic data, and those who toil there are heros.

Go to FRED and look up Spain. Try to find the size of government debt and of the liabilities of the Spanish banking system. Then go to the Banco de Espana, the ECB and Eurostat. Then appreciate my frustration. Spain is the biggest bad credit in the world, and its statistics are state secrets. In desperation, I turn to Moody’s, which has proprietary data and estimates available only to subscribers (somebody has to pay for this). It won’t open: the story of my life.

The Banco de Espana website offers me data on the liabilities of Spanish banks--right up to September 2008. What a curious date! The number then was 4.5T, if I read it right. The European Banking Federation gives the current number of 3.6T. So we know we are in the ballpark. My recollection  is that general Spanish government debt (center plus regions) is around 1T, which would give us a credit between 4-6T, which is systemically important: ten times the size of Lehman.  Is Mariano Rajoy the next Dick Fuld?

It is only a matter of time until this ~5T edifice is downgraded to junk by the rating agencies. Will that force European banks to mark Spanish debt to market, or to assign impairment reserves? Will that affect ECB collateral standards? Will that affect global concentration limits for Spain and its banks? Yes, yes and yes, unless Mickey Mouse is able to seize control of the global financial system.

We have been here before. Remember those fabulous credits called “Latin America”? Well, now we have shifted to “Latin Europe”. The difference is that the global financial system was able to absorb the Latin defaults between 1982 and 1992. It is not clear that there is sufficient profitability in the European banking system to write-off Spain. Especially in Spain.