2:00 9/6/12

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Birthday.

Things in Europe look like disaster from here.

There is a condition in macroeconomics called "Dutch disease".

http://en.wikipedia.org/wiki/Dutch_disease

"In economics, the Dutch disease is a concept that explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation's currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation's other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive. While it most often refers to natural resource discovery, it can also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment""

In the Spanish case the extractive resource was house construction.
Property was used to raise a fine crop of houses. The crop unfortunately exhausts the land.  It can no longer be used for agriculture. 
Capital is bound up in the construction cancer.
In Spain costs rose to the point of vanishing demand.
We have seen much of what followed here.  Several times.
Spain is a bit different.  The foreclosure does not cancel the debt.

http://en.wikipedia.org/wiki/Bankruptcy

" Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law (ley concursal) in 2003 which provides for debt settlement plans that can result in a reduction of the debt (maximally half of the amount) or an extension of the payment period of maximally five years (Gerhardt, 2009); nevertheless, it does not foresee debt discharge."

The Spanish banks are loaded with bad debt from their housing bust.
The IMF estimates twenty billion Euros. There is no mechanism in Spanish law to discharge these debts.  Twenty billion is a lot of deflation.
Germany will not pay.  The rest of Europe cannot pay.  Spain will default.




Greece:

http://topics.nytimes.com/top/news/international/countriesandterritories/greece/index.html?8qa

"After the leading parties were unable to agree to form a coalition, a caretaker government was installed until new elections can be held in June. The two main contenders are the center-right New Democracy party, which backed the bailout but now favors some modification of its terms, and the Coalition of the Radical Left, called Syriza, which wants to scrap the deal despite the warnings of the troika that such a step would be tantamount to a default and departure from the euro.
In the meantime, the Athens office that tracks revenue said Greece could run out of money by July, as tax revenue dried up with the deepening recession."

The ECB accepted no restructuring of the Greek bonds they hold.

That is most of them.  Only the privately held bonds were restructured.

The ECB will be bankrupt when Greece leaves the Euro.

Spain may make the Euro leave Greece.  Quick action is not available.

Bank runs are a good possibility Monday morning

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