Tags: Whalen | EU | Bank | Bailouts

Whalen: More EU Bank Bailouts Are Inevitable

Thursday, 10 May 2012 08:04 AM

By Forrest Jones and John Bachman

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Spain rescued real estate lender Bankia, and more such bailouts will likely follow, says Christopher Whalen, Senior Managing Director of Tangent Capital Partners in New York.

Spanish newspaper El País reports Bankia and its parent, Banco Financiero y de Ahorros (BFA), which holds most of the troubled loans, need the euro equivalent of $13 billion in government cash injections to clean up distressed assets from the property sector.

Like the U.S., Spain got caught up in the real estate boom, but the Spanish banking system and broader economy suffered much more than that of the U.S., home to a much larger and much more diverse economy.

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"Spain is an agricultural country. They don't really have the resources to support the debt that they have. I think you will have to see debt reduction, you'll have to see restructuring. Spanish banks are the worst in the whole E.U.," Whalen tells Newsmax TV.

"Everybody is worried about Greece, but Spain is a much bigger country, and their banks sold their debt to the Germans and the French, so that's where the risk is."

Not only does Spain not have the capacity to absorb such losses, high unemployment rates are threatening an already weakening economy and financial sector

Spain's jobless rate recently hit 24.4 percent, an 18-year high, the National Statistics Institute reported.

The country is officially stuck in a recession as well.

"I think you are going to see a couple of Spanish banks have to be restructured," Whalen says.

"In the U.S., even though we had a lot of problems — and there are still are problems in our banking system — we have much more capital. The U.S. banking system has four times as much tangible capital as the Europeans."

Not only is the European banking system lacking adequate capital, it's not creating new financial institutions either.

"I always joke and say we create more de novo banks in Texas every year than they do in Western Europe, but it's true," says Whalen, referring to de novo banks, which are state-chartered banks normally less than five years old.

"There is no opportunity to grow new wealth and create new opportunities in Europe because everything is so ossified. We haven't really had a break up of any of the industries in Europe in decades going back to World War II."

Turning to Europe's economy, Whalen says abandoning austerity measures today will fuel inflation down the road.

In France, socialist Francois Hollande defeated President Nicolas Sarkozy, as voters rejected austerity measures supported by the outgoing administration and rallied behind Hollande's calls to prioritize growth over slashing spending.

Under Sarkozy, France shared Germany's view that Europe needs to adopt belt-tightening austerity measures to streamline their bloated public sectors, yet a Hollande victory is fueling fears the two large European countries won't be as tight when addressing the European debt crisis.

Greece, meanwhile, agreed to austerity measures such as layoffs and pension reforms in exchange for bailout money arranged by the European Commission, the European Central Bank and the International Monetary Fund, but recent parliamentary elections reveal widespread anger is building against austerity voters view as dictated to the country from abroad.

In Greece, the country's mainstream political parties failed to muster enough votes in recent parliamentary elections to form a coalition that would stick with austerity in exchange for continued bailout money.

The leftist Syriza party is now trying to form a government, and concerns are growing Greece won't have a government in place by June, when a bailout tranche is due to flow into the country's coffers, especially since Syriza opposes austerity policies anyway.

Experts say Greece is falling deeper into crisis now that the country's main political parties, New Democracy and PASOK, are being pushed out by those farther to the left.

Critics of austerity say the pain associated with trimming deficits and paying down debts doesn't lead to fundamental improvements to the economy they were supposed to bring.

Supporters say take the pain now, and much better days await on the other side.

"Well I think they are going to embrace inflation," says Whalen.

"They're picking up the Paul Krugman playbook, which says borrow more money and deficit spend and use monetary policy to create the appearance of consumer demand. What nobody is talking about is debt reduction,"

Whalen adds, referring to Nobel economist Paul Krugman, who advocates more government influence in economic recovery.

"When you talk about Greece or Spain or Ireland, they can't survive with debt levels as such that they have today. So we clearly need debt reduction, but nobody wants to talk about that."


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