But What Next?
Markets Relieved at Spain Bailout Deal, Financial World Still Worried
Stock markets were initially up on the news of a $125 billion agreement to bail out Spain, but the financial commentators aren’t convinced—and are still gearing up for economic Armageddon. They’re wrong to panic, says Zachary Karabell. Plus, seven facts about the bailout.
Over the weekend, the Spanish government bowed to the necessity of seeking a bailout for its banking system. The amount was large: $125 billion in loans from the European Union to stave off the collapse of Spanish banks. The result was greeted with relief by financial markets around the world, with stocks initially rising, bond prices falling, and the outflows from southern European banks for the moment stanched.
Nonetheless, the commentary from the financial world was a resounding, “Yes, but ...” Financeland and its attendant media have become weary, cynical, and dismissive, the result of three years of ongoing crises of confidence in the euro zone. It’s Greece one day, Italy the next, then Spain or Portugal, then stern words from cash-rich but idea-poor Germany, then mixed signals from the French. All the while increasingly worried Italians, Spanish, Greeks, and others withdraw money from their bank accounts as the rhetoric turns ever more grim.
Added to the toxic sentiment stew are years of crisis and then pallid recovery in the United States and renewed uncertainty about the viability of China’s economic trajectory. Juxtaposed to that negativity, a weekend of Spanish firewalls to prop up a broken banking system with guarantees of more debt from a euro zone that has not even begun to resolve its collective morass is seen not as a solution but rather a brief reprieve. The inevitable storm will erupt either sooner, once the Greeks vote next Sunday, or later, once the next bank run or systemic crack appears.
The financial world has become almost universally convinced that “the Big One” is coming. What precisely that will entail is not exactly clear, but the consensus suggests that it will make whatever happened in the months after the collapse of Lehman Brothers in the fall of 2008 seem mild by comparison. It will be a global synchronous implosion of the fiat money system of paper currencies unchecked by impotent central banks and governments unable to coordinate policy quickly enough stave off collapse. Greece is seen as a possible trigger, the domino that will end up hindering Spain and then Italy from funding their debts, leading to the dissolution of the euro and generating global waves that imperil U.S. money-market funds and Asian stability.
These fears are so deeply embedded in all discussions of what is taking place that it is nearly impossible to have a coherent discussion in financeland about real risks and their likelihood. Yes, Greece may indeed elect a rejectionist coalition June 17 that refuses to implement the punishing austerity measures demanded in return for bailout funds, and yes, that could indeed lead to lots of bad things. And yes, China may simultaneously suffer the hard economic landing that so many have feared for years, with real estate truly crashing, growth halting, and instability following. And yes, the U.S. government may approach the “fiscal cliff” in the fall and fail to pass new tax and spending laws, thereby triggering downgrades and economic contraction.
All of these are possible. The question is, are they probable? The very fact that they are possible now means in financeland that they are likely, hence the tendency to sell now, seek safety, and then analyze. For Western publics, mired in years of slow or no growth—and, in the cases of Spain and Greece, stuck in a deep recession that is getting worse—the view forward is grim, and fears have greater weight than arguments for more constructive outcomes. The result is a global feedback loop of increasing negativity, which in itself has become yet another risk.
Yet at each moment in the past few years when those fears have reached a crescendo, actions have been taken to prevent everything from unraveling. Central banks have acted and governments have coordinated, almost in spite of protestations to the contrary. German officials have affirmed their support of the euro, but have almost routinely dashed any hopes that the European nations might join together and jointly absorb losses or issue debt before they have carved a common fiscal union at some point five or 10 years down the line. Yet at each moment of most acute tension, whether in the late spring of 2010 or late fall of 2011, Germany has bowed to necessity, and funds have materialized. Even in the United States, the budget impasse of the summer of 2011 ended with a resolution, not a default.
During the Cold War, the fear of nuclear annihilation and missteps coursed through many societies well until the late 1960s. Only after decades of coming to the brink and pulling back did governments and populaces come to accept that the ever present risk of global nuclear annihilation did not mean that such an outcome was likely, probable, or worth spending much time planning for. Similarly, in the financial system we now have globally, it is easy enough to envision scenarios that get to meltdown. That, however, doesn’t make those scenarios likely, and in any event, if the worse truly did come to pass, most contingency plans would be useless.
Just as in the Cold War, however, each moment of financial brinksmanship that leads to a resolution, no matter how temporary or messy or inadequate for the long term, is one step closer to normalizing and stabilizing the system. European nations by all accounts are moving more quickly toward the needed fiscal union than many would have thought possible even a few months ago, and that is happening because of these crises. China is slowing by design, and as several state and local governments—Wisconsin, San Jose, New Jersey, New York—in the U.S. are demonstrating, the mismatch between projected spending and real growth is being addressed more forcefully than it is at a federal level. Those are all strongly positive signs, but they are silenced in a sea of fear and anxiety that has swamped the financial world and considerable segments of public opinion.
The next crisis may be only a week away, when Greeks go to the polls. And then we can rehash different variants of the same debate and the same concerns that have been unresolved for years. But for a day at least, perhaps we can acknowledge that the strong drive to come together and solve problems is well in evidence over the course of human history, and expectations that those drives will rule the day are not naive. We know the Armageddon script almost by heart; it may garner the attention, but it isn’t the only show in town.