Thursday, 31 May 2012

Spanish Banking (2)

Yesterday I pointed out that, due to the financial crisis that started in the USA in 2008, banks in Northern European countries had to be bailed out by their governments, as happened for instance in Iceland, the Netherlands and Belgium.

Why then, we may ask, were Spanish banks apparently untouched? Why could the bungling PM of the day declare for all to hear that the Spanish banking system was the strongest in the world and would never need help? Why did the excrement only hit the Spanish airco system four years later?

Well, if you happen to have the answer, I will gladly listen to it. All I can do myself is give you the impression I got from listening to a million different forecasts and explanations in the course of the last few years. As I understand it, Spanish banks were playing in a different league and in another stadium than their Northern colleagues. Apparently the part of their reserves invested in the USA was rather negligible. Most of it was invested either in Latin America, which after the Argentinian slump began to grow again round about 2000, and in Spain itself. But there, in Spain, they were deeply, VERY deeply into the mud of the housing market.

This should have hit them as soon as the housing bubble burst in 2008. Except that, due to Spanish bookkeeping laws, Spanish banks did not yet need to show their losses on their balance sheets until 4 years later, i.e. today. During those four years they could maintain the fiction that the sellable and unsellable properties they held were still worth the money for which they had been acquired before the bubble burst. On paper, at the bottom line, they were still rich and healthy, since an abandoned suburban mansion, standing half-finished on the outskirts of Madrid and now gutted by gangs of copper-robbers and fixture-thieves, was still on the books for its estimated sales-price of 400,000 euros, instead of the depreciated ‘true’ value of perhaps 100,000.     

This ticking time bomb was not, of course helped at all by many of those home-owners with mortgages far beyond their means losing their jobs and failing on their payments. It was not helped along either by a more than absurd volume of construction for speculative reasons, without an eye to possible future demand. To give you but one telling number which I remember: it seems Spain has 25 million housing units. And it has some 46 million inhabitants. This means less than 2 inhabitants per house, in a country where families are large and often live together. To call this an imbalance is a masterpiece of euphemism.

Naturally, everybody who understood anything at all of banking knew what was coming. And so some measures were taken, in the vain hope that one might convince a hurricane to turn away from the coast. The now infamous Bankia is the result of that. It is, in fact, a very young financial behemoth, put together two or three years ago by the obligatory merger of several so-called ‘Cajas’, provincial saving banks. If I understand it well, these suffered from two horrid weaknesses. The first was that legally they were not exactly banks, and were therefore not equally – or sufficiently - restricted in the number and volume of mortgages they dealt out. The second was that they were the plaything of local politicians. CEO’s, appointed by the dominant political parties in the province, were given the task to create jobs, growth, prestige projects and fell-good experiences, which might translate into votes for the party. (Northerners may wince at this notion, but it is an integral part of the traditional client system of the Latin south, the Middle East and Africa whether we like it or not, and it works in a way).

This political dimension tossed one more venomous ingredient into the brew: political protection, read: impunity for the executives. Since a great many of the political leaders (from both main national parties and several of the great provincial parties) were at least partly responsible for the mess, and since it is likewise part of the client system not to crack down on those who are loyal to you, the bankers involved were not immediately called to account, but were expected to cover up the damages as well as they could, until an easy way out might be found, or the mess might be blamed on the other political party. This is one more aspect which postponed the arrival of the hour of truth.

Thus not only did the Spanish rules of bookkeeping mask the problem for a number of years, but it turns out that the bigger banks have been lying through their teeth to cover up the true size of the problem. Bankia – which is merely the 4th financial entity of the country – last February still pretended to have made a 300 million profit over 2011. It now turns out there is a 3 billion loss! And as the scandal grows, the estimate of the sum it will take to keep the behemoth afloat is doubling every week. It was 4 billion two weeks ago, then turned into 8 or 9 one week ago, today it stands at 19 billion Euros, even though the sum of 24 billion has already been whispered! (The entire hole in the balance sheet seems to 40 billion).

In fact, the thing is simply bankrupt. But once again, like Freddy and Fannie, like ABN Amro, Fortis and… well, you name them: it is too big to fail. And so a solution must be found. Since this post is already long enough itself, I’ll dedicate next Saturday’s post to that dire question (tomorrow being Cookbook Friday).

Meanwhile I would earnestly welcome comments from those whose understanding of this tangle is better than my own! Alfred B. Mittington, aged and brilliant as he may be, is still young at heart and very much willing to learn!

[PS In roughly the middle of his blog, Colin Davies today (May 30) has a piece of news on a possible Eurobond Light which seems to be in the making so as to finance Southern debt at reasonable cost, while preserving national say and sovereignty in the North. Let’s see how that works out.]

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