Why Europe’s extend and pretend strategy will fail

Michael Pettis had a great write-up on the situation in Spain and Europe's depressing prospects. While his conclusion that Spain will be forced to exit the euro zone is something I have yet to endorse, the logic he uses surrounding many of the economic and policy constraints bears remembering. In particular, his comments on Europe's inability to extend the crisis and pretend their banks are solvent are important because the undercapitalisation of Europe's banks lies at the heart of this crisis.
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