Jitters over eurozone stability won’t end any time soon. This week the Spanish government bailed out Cajasur, a savings bank hit by the bursting property bubble. A state-financed rescue package for the ailing savings banks could end up costing €35bn, reckons Standard & Poor’s – adding to the public debt pile.
The broader worry is that eurozone banks have swept their bad debt problems under the carpet. The IMF points out that the eurozone is well behind the US in terms of writing off bad assets. Wolfgang Munchau in the FT highlights a report estimating that the German Landesbanken (regional wholesale banks) could have to write off up to e800bn.
Former Bundesbank head Karl Otto Poehl said last week that the huge bail-out package for southern Europe was designed to protect French and German banks from having to write down their debt holdings. Given the opaque state of the banking system, investors, as Munchau puts it, “have good reason to treat the eurozone in the way they should have treated subprime CDOs”.
Be afraid.