That Retired Guy (TRG) spent a few weeks away from the blog, but he's back now. In the time that he was gone, a strange calm settled into the markets. It is strange because the overall picture has probably become more troubling even if the terms for Spain seemed more acceptable. The Spanish bank bailout exposed a new dynamic in the European political landscape. France can no longer be expected to march to Germany's orders. Now, Francios Hollande has become a sort of kingmaker, and he seems keen to make anyone but Angela Merkel king. In the last round he sided with Mariano Rajoy, and Mario Monti but in future rounds, it's harder to predict.
So the last few weeks have created yet more uncertainty for the future. Certainly, the problems have not become any less urgent, but the solutions are even more remote. So where are the fault lines for the next few weeks? The may reside in surprising places:
Watch The Budgets and Forecasts
It is now mid summer, mid year, and the next round of GDP and budget forecasts will be on the way soon for most of Europe. The expectations are low, and TRG expects that there will be no positive surprises. The reason this is a fault line, is that serious issues can (and probably will) be exposed even without negative surprises. In Greece for example, it will probably start to become clear that even more bailout money would be required to end the crisis. France, Spain and Italy each stand a serious risk of looking weak in the numbers, and any one of them can easily set off another catastrophe. Although less likely, even Germany could have bad numbers. Basically, over the next few weeks, there will likely be problems unless every country in Europe surprises to the up side, and that is certainly very unlikely.
This is not exclusively a European problem , but the fault line here is so broad for the banking industry that Europe can not possibly be excluded from the trouble. It may take more then a few weeks for this pot to really boil over, however the heat has been on 'high' for a while now, and it just gets more and more dangerous. As Bloomberg notes, the real problems will come when the banks start to fight each other. Any bank involved in fudging LIBOR (or any other benchmark rate) will face a horrible one sided liability problem. The problem is that they will be sued by every injured party, but they will have no way of claiming from parties who benefited from the fraud. The potential liability is huge, hard to calculate, and likely to start showing up in the next quarters results. European banks desperately need profits to repair their balance sheets, so a big LIBOR problem could easily snowball.