Data from the European Banking Authority (EBA) reveal that most European lenders have reduced their exposure to sovereign debt during the past several months, but many Spanish banks have not followed suit. The Spaniards have cut credit to public administrations by twelve percent, but they have not trimmed their positions in treasuries. In Bankia's case, it has increased shares in this asset by eighteen percent while the sector average is only two percent.
The relationship between sovereigns and financiers characterizes the crisis. Since the possibility of defaults on public debt issue was introduced, lenders have been forced to flee these assets. The lack of confidence has gotten to the point that private dollar financing has disappeared from the scene in Europe. So central banks have had to coordinate their financing collectively.
Last week EU authorities attempted to revitalize the cursed relationship between private banks and national central banks that are still bending the rules. The ECB reduced the reserve coefficient, will allow low quality guarantees and will issue three-year loans at a rate of one percent. Along with a declaration made during the summit that there would not be another debt restructuring process, everything looks designed for the banks to start buying up sovereign debt again, because they will be getting financing at one percent rates, but they could loan the debt to countries at substantially higher rates.
That is to say, a big risk arises if we continue to feed the vicious cycle of countries sucking up all available credit, impeding growth and, consequently, allowing fewer profits and ever more loans in order to make investing in Spain credible to the banks.