By Rom Badilla, Bondsquawk
At a time when everyone is blaming the banks for causing the crisis, one tends to overlook the actual cause of the banks abysmal performances writes Global Strategist, Albert Edwards from Societe Generale in his latest Global Strategy Weekly article, “Another Lesson from Japan: Spanish Banks are Not the Problem.”
Consensus believed Japanese banks were at the apex of Japan’s economic woes and the main problem. Hence bank recapitalisation was seen as the key to turning the economy around. Peter’s view was that although the banking sector was indeed damaging the economy via a credit crunch, the banks were not the problem but a symptom of the problem: the true problem was deflation and the lack of stimulative policies. Indeed, Japanese banks did not start underperforming the overall market until 1997 as they became the victims of the economic weakness; they were not the origin of that malaise.
Japanese banks began restricting credit from the mid-1990’s, which in turn led to more economic weakness and the continuation of a vicious cycle of more declining asset values, underwater loans, and further need for capital. This cycle continued when deflationary policies remained and despite a bailout and recapitalization of banks’ balance sheets.
And so it is in the Eurozone: Spanish banks need recapitalization because of the deflationary policies forced on them to reduce Spain’s public sector deficit at a time when the private sector is also de-leveraging. Clearly this has a lot further to go and house prices will fall even further as a result. But the lesson from Japan was that overly focusing on the banks as ‘the problem’ is misguided and until or unless deeply deflationary policies are altered, the Spanish banks will be back for another bailout before too long.
(Spanish Household Debt & Home Prices)
If this bailout is only the beginning, then resolution to the crisis is still far and away. Until stimulative policies are used as a solution, then concerns and market volatility will remain for the time being.