The success of this little merry-go-round is why Europe calmed down last December. The ECB in effect prints money which it gives to busted banks. The busted banks lend the money to insolvent governments at artificially low rates (but at rates that still allow the banks to make a profit). It was a neat little trick that kept the crisis quiet without forcing the Germans to admit openly that the ECB was in effect using German resources to bail out the rest of the zone.
Bank runs, even virtual bank runs, would blow this fragile arrangements to bits. As the prospect of Greece leaving the euro becomes more likely, savers in Portugal, Spain and Italy have to start wondering if their countries, too, will have to jump ship. Sophisticated investors have been moving their money out of those countries for some time; things may soon reach a pass in which ordinary, unsophisticated investors start to do the same thing.
Sunday, May 20, 2012
Ratcheting Up The Crisis In Europe | Via Meadia