Last week a source reported that Spain was effectively cut off from the capital markets. This would put Spain in the same boat that Greece currently resides.
But was the report true? Today's news virtually confirms it.
Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme.
On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer.
One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”
Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent.
“The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”
This story contains two nuggets of information:
1) that the rumors of Spain being locked out of the international capital markets were true, and
2) that Spain's banks are staring down the barrel of insolvency with the end of the ECB lending program.
The thing to understand is that Spain is not Greece. Spain's economy is five times the size of Greece's. Spain's unemployment rate is 20%, nearly twice as high as Greece's.
The Euro may be able to survive a default by Greece, but there is no way that it can survive a default by Spain. A collapse of Spain's banking system would have the same effect on the world economy today as the collapse of Creditanstalt did in 1931.