lunes, 14 de noviembre de 2011

When a liquidity problem becomes one of solvency...

Events in Europe are moving faster than imagined. On October 27, European leaders announced the breakthrough that had eluded them for so many months. They agreed on a loss-sharing formula with Greece's bankers and to two critical preventative measures, enlarging the rescue fund and raising capital standards for banks.

Just over two weeks later, the Greek and Italian leaders resigned in response to market pressure, spreads on French debt (over the equivalent German bonds) have widened to their highest level since the adoption of the Euro in 1999, and the fate of the Euro and the European Union are being seriously discussed.

Investors have seemingly become hyper-sensitive to risk, at least in Europe. A run on any country can abruptly convert a sustainable situation into one that is not. A self-fulfilling prophecy can turn a liquidity problem into one of solvency. That is the danger Italy and European banks are facing today.

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