Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

tone toward the EU became more belligerent.28 New loss provisions called for from the Spanish banks were inadequate to calm the markets. By the spring of 2012 only huge injections of liquidity from the ECB were keeping Spain’s financial system afloat. But maintaining liquidity was not the same as restoring solvency. On May 9, 2012, Bankia declared that it was on the point of bankruptcy and urgently needed recapitalization. By May 25, with Bankia under new management, the figure had risen to 19 billion euros in new capital.29 With its economy already depressed, the last thing Spain needed was a new round of banking crises, and it would be even worse if a bank bailout spiraled, Irish style, into a bank-sovereign doom loop. Following the Bankia announcement, yields on Spanish public debt surged to 6 percent and then began to inch up toward 7 percent, above which Spain’s debt burden would begin to snowball as rising debt service costs further inflated the deficit. By May 2012 it was clear that Europe was once again sliding toward the edge. Bond market yields were rising around the periphery. It was a dire outlook. According to IMF figures, in the course of 2012 alone, Europe’s governments and banks needed to roll over and refinance debts amounting to an impressive 23 percent of GDP.30 They simply could not afford interest rates to surge out of control as a result of a panic in Spain.