A few months back, the European Central Bank starting opening a line of credit for European banks in an attempt to avoid any bank failures. Banks in the ailing Italy and Spain took some of the money from the ECB and are reportedly running out of those reserves.
Italian banks have spent 46.4% of the funds that they had received from the ECB, while Spanish banks have used up 42.3% of their capital. In terms of being able to use the reserves to buy government bonds, Spain only has 1.6 months left if the buying continues at the same rate while Italy has under a month.
Spanish and Italian banks have been buying government bonds hand over fist since they received the funds from the central bank and now a loan which was intended to last for quite some time, will have ran out by summer.
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Of the 26 government bonds tracked by major organizations such as Bloomberg, Spanish bonds were the worst performing with a loss of 1.8% while Italian bonds were second worse with a loss of 1.3%.
The real thing that needs to be talked about now is will banks in these countries survive after they run out of funds? This very well could be a dark summer and rest of the year if this problem is not solved immediately. Germany can not continue to bailout Spain and Italy because soon Germany will be in the same mess and the Euro will crumble if Germany falls.
The German population is against more aid to other countries as they are beginning to feel the strain of being the European creditor. Not to mention there is a huge movement in Germany to leave the Euro and go back to the Mark. However, the problem with that is if a large, powerful European country was to leave the Euro, there would be chaos and market crashes all over the world.
The bottom line is that there needs to be a game plan for banks in Spain and Italy before there is a long string of bank failures which could cause an overall default. We do not want this to occur unless we want to see market crashes and recessions. Unfortunately, credit sources in the Eurozone, Germany and the ECB, are almost maxed out on what they can hand out to other European countries. If this is the case, the Eurozone will need to turn to China and the United States to help bailout Spain and Italy but lets hope it doesn’t come down to that.