Mariano Rajoy, the Popular Party Spanish prime minister of Spain, appeared at a special press conference on June 9 to give the nation the good news—Spain had won the lottery! A €100 billion prize in the European Bank Rescue Lotto!
Make no mistake, señoras y señores, this was not a “bailout package” or a “rescue” of the kind inflicted on Greece, Ireland and Portugal, full of those nasty “macroeconomic conditionalities” imposed by the “troika” of the European Union, European Central Bank and International Monetary Fund..
No, this was a whopping “line of credit” negotiated on favourable terms by yours truly by putting those people in Brussels under a whole heap of pressure.
Anyway, enjoy this good news, because I’m off to Poland to watch Spain play Italy in the European Cup…
This strange performance of the increasingly stressed Rajoy has only increased the cynicism of a Spanish public already cynical about government efforts to save the country’s banking system. The historic highs registered by the yield on Spanish government debt in the week after the announcement confirmed how well-placed that cynicism is.
Just how much money is needed to stabilise the Spanish financial organism? There’s a wide range of figures to choose from. The International Monetary Fund’s Spain: Financial Stability Assessment put the cost at €40 billion, and there was no way that Spain could find that kind of money.
Finance minister Luis de Guindos asserted that the solution worked out in Brussels by the Eurogroup of finance ministers—an EU loan of up to €100 billion to the Spanish state’s Orderly Bank Restructuring Fund (FROB)—would therefore provide a “comfortable cushion”.
Yet that massive sum still falls short of the figures for bank recapitalisation that have been produced by private investment bank studies, which put the sum needed at anywhere between €134 billion and €180 billion.
Maybe two private assessors whom the government is bringing to Spain will come up with more favourable figures. These two experts have had to be taken on because the Spanish government has lost confidence in the Bank of Spain as overseer of the banking system, pressuring its governor to retire early. But what if the private consultants confirm the assessments of the private studies done to date?
The various “rigorous evaluations” of the financing needs of the Spanish banking system have become the stuff of comedy ever since it was revealed a month ago that Bankia—the seven-bank conglomerate most exposed to depreciating real estate and rising mortgage default—needed €3.5 billion to achieve recapitalisation.
Did I say €3.5 billion? Make that €9 billion. Sorry, I meant €19 billion. Look, just add on the €4.5 billion the FROB has already provided to Bankia and let’s call it a round €23.5 billion. And we hope we won’t be coming back for more.
Rodrigo Rato, the former IMF boss and CEO of Bankia, who was forced to resign after its evaluations were rejected by the auditors, has criticised the size of this package on the grounds that it is based on an extremely conservative assessment of the value of Bankia’s assets and exposure to risk.
Rato, even though he is rightly being taken to court by the 15M movement for dereliction of duty as a bank executive, has a point. How do you evaluate the mountain of empty real estate on the banking sector’s books when its price depends on the state of the market (at present extremely depressed)? Any valuation must include a big element of guesswork, which explains the very wide range of numbers for bank recapitalisation produced to date.
And how will Spain’s “line of credit” with Brussels actually work? Firstly, at the time of writing we still do not know if the funds will come from European Financial Stability Facility (EFSF) or its successor European Stability Mechanism (ESM).
The difference is not small—repayment of interest on funds provided by the ESM takes priority, IMF-style, over any other government debt obligations. Which is why the Netherlands and Finland are demanding that the loan to Spain come from the ESM.
In the words of Greek economist Yanis Yaroufakis: “This means that for every billion that the Spanish government borrows from the ESM (as opposed to the EFSF), investors around the world will know that, if Spain at some point cannot repay its loans, they stand to lose (with certainty) a larger portion of their investment (as the Spanish state is forced to repay the ESM every last euro before repaying other creditors).
“Which means, of course, that private investors will be even more reluctant than now to lend Spain. Which means that Spain’s bankruptcy is that much closer.”
Secondly, the Spanish bank restructuring is not to be done by the Spanish government. Representatives of the Eurogroup, the ESM or EFSF and the IMF will run the show, immune to any popular pressure for a public inquiry into the Spanish banking fiasco and for the establishment of a public bank.
Thirdly, the claim that the package is “only for the banks” and doesn’t affect the Spanish state is a fiction. The Spanish state is required to guarantee EU loans to the FROB—the greater the FROB loans needed to recapitalise the banks, the greater Spanish state indebtedness to the ESM or ESFS.
Fourthly, as is spelled out in the Eurogroup communiqué: “The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The Eurogroup is confident that Spain will honour its commitments under the excessive deficit procedure and with regard to structural reforms, with a view to correcting macroeconomic imbalances…Progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance.”
In plain English, the claim that there are no “macroeconomic conditionalities” is a fiction.
Lastly, the arrangement increases Spain’s public debt to GDP ratio by 10% (to 80%) in one hit. This figure is still below the EU average, but while the Rajoy government priority remains saving the banking system, its spending on bank rescue could well grow beyond the €250 billion already spent or promised, increasing the pressure for even further offsetting cuts to areas of the budget that have already suffered ferocious blows (like health and education).
In a critique of the Spanish package, the Financial Times columnist Wolfgang Münchau stated on June 11 that “the idea for the European Financial Stability Facility to lend money to the Spanish bank recapitalisation fund…does not meet this test [of making Spain’s position in the Eurozone sustainable].
“It reshuffles debt from one end of the Spanish economy to another. Spain’s total debt was 363 per cent of gross domestic product in mid-2011…and with the prospect of a severe economic depression ahead, its crisis cannot be solved through a combination of austerity and liquidity support. The Eurozone must recognise that some form of debt relief, or default, will be inevitable.”
But is “the Eurozone” even listening to such voices? The urgency of the Spanish bank rescue package and its international staging were not just about Spain, but Greece too. The incredible international media prominence given to the Spanish “soft rescue” was also aimed at getting the message across to the Greek electorate that (1) if the left wins the elections there will be no renegotiation of austerity packages and Greek exit from the Eurozone will be inevitable, and (2) that in such a case the troika has already taken whatever measures are necessary to prevent “contagion” in the rest of the Eurozone.
That purpose also becomes easier to grasp once it is understood that this latest package, even if by chance correct in its evaluation of the funds needed to achieve bank recapitalisation, will do little if anything to attack the underlying Spanish economic crisis—and is not designed to.
Firstly, because it will reinforce the job-destroying austerity policies of the Rajoy government, and secondly, because it does nothing to tackle the vast sea of overproduction and private debt built up during the “good years” before the crisis hit in 2008.
We can compare Spain to Ireland, the other European site of a massive housing bubble. The Irish state has also underwritten its banks’ future losses, but the fall in real estate prices is beginning to slow in Ireland, indicating that the bottom of the black hole may appear soon. In Spain, with only a 27% fall in average real estate prices since 2007, it is impossible to say at what point market bottom—and maximum bank losses—will be reached.
Endless injections of liquidity from the FROB won’t solve the problem while hundreds of square kilometres of Spanish real estate remain unsold. The only way out is for the banking sector as a whole to be nationalised and its accumulated debt subject to a citizen’s review that decides in what proportion it should be dishonoured, honoured and rescheduled.
In a country where 400,000 sleep out every night and shanty towns are reappearing in its major cities the stock of empty housing should be made available at affordable rents to those most in need.