Today on the Eurozone Crisis
By Arnold Kling
An entire article on the two-drunks problem.
The European Banking Authority ordered the region’s banks on Dec. 8 to raise 115 billion euros ($154 billion) by June. Faced with dwindling profits and unable to tap capital markets to sell new shares, firms may be forced to seek government help. About 70 percent of the capital requirement falls on lenders in Spain, Greece, Italy and Portugal, countries struggling to convince the world they can pay their debts.
Read the whole thing. I thank Tyler Cowen for the pointer.
I wonder if one scenario is that Italian banks borrow from the European Central Bank at 1 percent and lend to the Italian government at 6 percent, which then uses some of this borrowing to inject capital into the banks. Think of this as the two drunks propping each other up, with the ECB helping (er, “helping”) by generating a lot of inflation.