INCLINE VILLAGE, Nev. — This past weekend Eurozone leaders surprised investors by bailing out Spain’s banks to the tune of 100 billion euros. That shouldn’t have been a surprise because it was in everyone’s interest to make sure there wasn’t a run on Spain’s banks. There was no constituency for failure to avert a run. European leaders didn’t, and won’t, stand idly by and watch their currency and economies go down the tubes. Positive action was and is far more likely than a collapse into chaos.
There is good news that is unreported by the media. Think about it — Greek banks have lost billions in deposits as investors move their money to other more stable countries. The Spanish deposit flight has been huge, too. Yet, there has been no reported failures for those who want their money from banks. That’s remarkable. Why?
Once their backs were to the wall, European leaders faced the issue and added liquidity to the system. Similar to our Federal Reserve, the ECB has the tools available to offset liquidity crunches. The leaders have shown that liquidity issues will be addressed anytime there is a problem in the Eurozone. The alternative — bank failures and a collapse of the euro — is not in their best interest.
Liquidity is not the same as solvency. Liquidity is not a concern because depositors continue to have access to their money. Countries may become insolvent, however, if they can’t pay their debt.
Insolvency is harder to fix. Some countries have promised far more than they can deliver. Some (Germany, for one) want austerity measures to slow spending, others say spend even more. We’re hearing the same debate here as well. The key difference is that investors are gobbling up our government’s securities. Don’t put me in that group.
European leadership caused the solvency problem. Can they now fix it? We’ll be watching.
— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.