Spanish Banking (1)

From here on the banks of the river Minho, I cannot help but get the impression that you world citizens out there are somewhat baffled by the situation of the Spanish financial system. So – noblesse oblige! - I ought to give you my take on it, were it not that – expert as Al Mittington may be in innumerable fields of human knowledge – he is (i.e. I am) no less baffled by it, dear reader. Nonetheless, let me give it some try, making use of my one advantage: I live across the road from the place…

The original problem of the Spanish banking system is not too difficult to grasp. It roughly goes like this. Spain entered the European Union in the early 80s, after a 40-year autocracy which had kept its development dismally low. The huge potential for growth, plus generous EU subsidies, generated a vital, booming young economy in the 80s and 90s. This was fine and deserved. Unfortunately, due to a psychological peculiarity in the Mediterranean mind, the sector that grew and flourished most was not industry or services or IT, but construction (known in Spain as ‘ladrillo’, or ‘brick’). Cheap housing, tourist hotels, office towers and utility buildings sprang up like mushrooms with a vengeance and a submachine gun. By the mid and late nineties, this original success story was pushed over the edge of wisdom and sustainability by the arrival of two new factors: deregulation and the Euro. The first made sure that developers could start pharaonic projects even easier than before, and that banks could take greater financial risks. The Euro, for its part, lowered Spanish interest rates to German levels, since the ECB rather predictably set policy which was good for its most successful participant, the Bundesrepublik.

The result was that an initial success story turned into a humongous bubble. Developers could not gobble up fast enough the cheap and easy credit that the banks were willing and allowed to hand out. Private citizens borrowed to their heart’s delight, buying houses way beyond their means, often taking out mortgages (which the banks gladly provided) which covered 100 % of the real estate price, reserves for its renovation, funds for furniture and fixtures, a neat sum for a new flashy car and – no I am not making this up! – an extra few thousand for mama’s mammal enlargement. Additionally, very average middle class families – rather than buying stock or putting their wealth away in saving accounts which yielded little interest - began to invest in speculative house-buying. They would inscribe for new, still-to-be-built apartments, paying for their acquisition through cheap credit and at the price level of year N, with the object of selling the property, once finished, in year N+4 for the risen price of that year (real estate prices understandably rose much faster than inflation under pressure of the ever growing demand). The proceeds from these profitable operations – say 25 % - were then ploughed back again into the next endeavour. An additional factor which drove the price level up was the arrival of foreign buyers, from such cold places like England, Germany, France and Holland – looking for holiday homes on the sunny Spanish coasts.

It was a bubble, but who was going to stop it? Even those who understood that such an upsurge could not go on forever (and believe me: there were many simpletons and supposed experts who claimed that the market would never come down again!) could barely bring themselves to do so. The national governments (of both left-wing and right-wing vintage) reaped huge profits in taxes direct and indirect, which enabled them to please their voters and their citizens. What is more: the booming bubble created jobs… So very many jobs that Spain could ever absorb three or four million foreign workers, largely from Latin America and the Maghreb. GNP surged as the bubble grew, which brought the further delight of making Spain more important on the international scene (who of us does not remember PM Zapatero – that student leader playing at elder statesman - claiming triumphantly that Spain had surpassed Italy in GNP, was now the 8^th economic power on the globe, and would soon overtake France!?) The same sort of blind, flight-forward attitude reigned supreme in the governments of the Autonomous Provinces, while on a municipal level mayors and aldermen – even the incorrupt - were happy to play along, since selling off low yield agricultural soil to developers for a high price was just about their only substantial source of income. Etcetera etcetera. Everybody was a believer, and everybody in the end discovered that the deities they had worshipped and obeyed were but hollow statues cast in plaster…

In 2008 Lehmann Bros. tumbled and the domino effect started. Northern banks with lots of investments in the States ran into trouble and had to be bailed out. The European economy hit a slump, which translated immediately into the so-called Sovereign Debt Crisis. That is to say: the crisis slowed down southern economies that had borrowed far too much because the Euro interest rate was far too low in comparison with their productivity. Consequently southern governments suddenly found themselves owing debts they could not possibly repay. Their net income went down as their interest rates went up. An evil spiral had set in, more particularly because the most effective time-proven method to take the pressure off the kettle – devaluation of the national currency (effectively lowering salaries and export prices in a single sweep) – was no longer available to the individual Euro countries. Debt crisis was thus added to economic crisis. And that is where we still are today.

Enough for today. Tomorrow we will take a look at the Spanish banks that stir up such fears at the moment.