Banco Popular is offering a timely 4% loan that will help them rework many of their soon-to-be-due deposits. This move shows that the war to win funds is continuing, and the reasons that it started are still valid. In Spain, the economy has run aground and risk factors have driven up bank interest rates. That said, the broader problem is not just Spain's fault.
A general anxiety about the state of the banks is spreading throughout Europe. Can they can withstand the lack of growth or heavy losses when the sovereign debt sitting in their portfolios is removed. This question has frozen the global credit markets. Once again banks don't trust each other. When this happens, the loan environment for the rest of the economy tightens up.
Although most lenders have been meeting their obligations for several years, Lagarde's recent statements caused a wave of terror to rumble through the industry. The United States cannot be counted on for bailout funds in a worst case scenario, so there must be other possibilities. No solutions look good, frankly. Some contend that the European Central Bank will offer support, even considering the risk that the US will stop printing money. Another option is to deploy the European recovery fund, even though this measure would create more sovereign debt. For all Trichet's insisting that there are no liquidity problems, there sure is a lot of worry. And this fear could destabilize the financial system in Europe. There must be measures to calm the fear and address some serious underlying issues.
