FT Alphaville " Albert weighs in On the back of the glorious victory in yesterday's Thomson Reuters Extel survey, Societe Generale's Albert Edwards has a note out on Spanish banks (his emphasis): The Spanish banking sector is a victim of deflationary policies enacted at the behest of German economic orthodoxy. A bailout will solve nothing. He compares Spain and the eurozone to Japan in the 1990s. In Japan the banks weren't the problem, but merely a symptom of deflation and failure to stimulate. In fact, Japanese banks didn't start to underperform the total market until around 1997: However, from that time on, it was easy to see why it was mistakenly thought to be the problem: In that Japanese banks began restricting credit from the mid-1990s, sending the economy into a downward spiral, they certainly became part of the problem. In Spain, as in Japan, banks are suffering from deflationary policies. Just bailing out the banks - without changing policies - accomplishes nothing, except likely more bailouts in the future. In Spain's case, the fall in real estate prices combined with public and private de-leveraging is causing bank failures. Edwards" conclusion (our emphasis): Spanish banks need recapitalisation because of the deflationary policies forced on them to reduce Spain"s public sector deficit at a time when the private sector is also de-leveraging. Clearly this has a lot further to go and house prices will fall even further as a result. But the lesson from Japan was that overly focusing on the banks as the problem is misguided and until or unless deeply deflationary policies are altered, the Spanish banks will be back for another bailout before too long. Pretty clear talk. We think this one is meant for you, Brussels. This entry was posted by Simon Hinrichsen on Wednesday, June 13th, 2012 at 14:45 and is filed under Capital markets. Tagged with japan, spanish banks.