The Spanish stress tests are in, and the verdict is that Spain’s lenders would need an additional $78 billion in capital to withstand a worst-case economic scenario.
It is highly unlikely the core eurozone would be willing to take on significant exposures to Spain and Italy unless it can be established unambiguously that a wilfully and persistently non-compliant programme beneficiary will be denied further funding. Therefore Grexit would become even more probable should Spain and Italy require a broader troika programme and external help, respectively, which appears likely.
Or, we guess, moral hazard. It would be difficult for Europe to put any teeth in the Spanish bailout if at the same time the troika softened the terms of the Greek rescue plan. Which brings us to another theme, which is beginning to feel inevitable. Two weeks ago, former Lehman Brothers executive Michael Tory wrote that Europe needed a “Lehman moment” to push politicians into the decisive course of action needed to save the region.
At the beginning of this week, Fortress Investment Group principal Mike Novogratz told Bloomberg Television that the upside of a Lehman moment would be to force “European authorities to really decide if they are in or if they’re out.” Goldman Sachs COO Gary Cohn told Bloomberg that “Politicians sometimes need the moment in order to do what they need to do.”
What happens then?
“Grexit is likely to create extreme deprivation in Greece, and lead to social and political instability,” wrote Mr. Buiter.
As for the rest of the region, the Citigroup economist suggests that the European Central Bank is capable of supported at-risk sovereign states through a Greek exit. Which, we hope so, because if we’re all so settled on throwing Greece to the wolves, it would be nice if that sacrifice served the purpose of helping Spain dig out.
