''In Greece, the problem is an insolvent government bringing down the banks. In Spain, the problem is now insolvent banks bringing down the government. This column argues that despite their differences, the potential costs to the rest of Europe mean that both problems require a European solution.
The diabolic loop between the solvency of the banking system and the sovereign fiscal position is now apparent (Lane 2012).
- In Greece, it is the insolvency of the government that has sunk the banks;
- In Spain, the banks are sinking the government.
What is common in both countries is that savers are running away when they see the banks and the sovereign propping each other up. Unless the banks in both Greece and Spain are soon recapitalised, the on-going gradual deposit flight might turn quickly into a classic run, the consequences of which are hard to imagine..''
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