Evercore Pan Asset

The Euro crisis is putting large strains on the European banking system. Much now rests on how the ECB behaves as it is central to providing liquidity & ensuring transfers of funds from the surplus to the deficit countries.

EU consideration of 10% more of regulatory capital for the large banks may be fine in the longer term reassuring people and avoiding excess credit. However, at a time when most of Euroland needs more growth and better credit lines for good projects, it is another twist in the deflationary direction.

The Spanish crisis is not just a crisis brought on by too large a state debt and deficit. It is also a property and banking problem where falling property prices weaken the banks more. High unemployment, high taxes and a private sector squeeze are making things worse.

Beware the pain in Spain. Last week’s austerity budget and general strike do not offer a solution to the pressing problems of the Spanish economy. Like other Euro members they need more growth to get out of debt, but the weak state of some banks and the need to rein in the public deficit make growth elusive.

The authorities in the USA, UK, Euroland and China will still want to keep money relatively loose to promote growth, and to keep banks liquid. They are well aware of the continuing banking problems, and large imbalances between west and east.