This Could Sink Banks in Greece, Portugal, Spain, and Italy

Wednesday, April 8, 2015
By Paul Martin

by Wolf Richter
April 7, 2015

Not that much has changed in Spain since the climax of the debt crisis during which its collapsing banks were bailed out. Some of them were recombined into a bank with a new name – Bankia – and sold to the public via an IPO that immediately sank into red ink and scandal. Spanish government debt sported yields that reflected the risks of owning it. At this time in 2012, six-month T-bills yielded over 3.2%.

But that part has changed. In this absurd era when risks no longer exist in a quantifiable manner, the Spanish government today joined a growing club: it issued its first debt – 6-month T-bills – with a negative yield. Spain!

But the European Commission is now contemplating pulling the rug out from under the banking miracles in Spain, Portugal, Greece, and Italy.

Turns out, these four countries have been smart in how they propped up their rickety banks. They and their banks have declared something a “high quality” asset even though it has a dubious value, no market price, and can’t be sold. And they have included this totally illiquid asset of dubious value in the “core capital” of the banks. This asset significantly increases the “capital buffers” and makes the bank more resistant to shock and collapse, on paper. That’s how they solved their banking crisis.

The Rest…HERE

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