Tuesday, 5 June 2012

Spanish Banking (3)

As I explained in my last little article on the subject, until the present year Spanish banks could still represent the value of their holdings by the prices that had originally been paid for them, i.e. before the crisis struck. Only now they need to show the real market value of their real estate assets on the balance sheet. And guess what: it turns out they are bankrupt. Bankia, the worst of the big ones as far as we presently know, is in the red for some 24 billion Euros. It has had an emergency government injection of some 5 billion. But there is still a huge hole of 19…

How do you solve such a thing? Well, by throwing money at it. Public money. This is hugely unjust (the famous ‘privatisation of profit and socialisation of losses’ which even Mr Barroso once fulminated against in an interview) but it is necessary, since banks these days are Too Big To Fail. That is to say: if one goes, they all go, and they pull down the rest of the economy with them as they sink. So unless you enjoy the prospect of a Great Depression, that is not what you want to allow to happen. When having to choose between Injustice and the Abyss, one accepts Injustice. So you sink tax money into the banks, as gifts, or loans, or in exchange for stocks, by which the state becomes the (partial, or main, or total) owner of the bank. Once the crisis is over, so goes the theory, you privatise the bank again by selling off the stocks you gained, and nobody is worse off.

Fine. What must be done must be done for the good of the future. Except that today, in Spain, there is this added little problem of WHERE to find the money to shore up those banks. In what little piggy bank is the Spanish government to dip its hand to pull out the necessary funds? Ready reserves there are none in this time of economic slump. And to borrow this little extra sum on the financial markets - which was the first proposal I heard - is absolute sheer and total nonsense.

You see: Spain’s main problem today is caused by the costs of its present borrowing! Due to the crisis and the nerves of the financial markets, it is unable to renew its government loans cheaply, and hence it faces massive problems of liquidity. Higher interests turn into ever more ballooning debt, which turns into more nerves of the financial markets, which turns into higher interests yet again! And so on and so forth. This is why, on top of it all, the country is in the process of reducing its budget deficit (and so its public debt in the long run) in obedience to Brussels instructions, from last year’s 8,5 % to this year’s 5,3 %, and next year’s 3 %, so as to reach a balanced budget by about 2016. To do so, the government is cutting education and health care with a ‘mere’ 10 billion, and that already puts such a strain on society in all sorts of ways that tempers are running high (to put it mildly), and that the economy is suffering heavily, aggravating the problem even more. The vicious escalation is alive and kicking!

And now, to save one (repeat: only ONE) of its banks, the country should borrow an extra 19 billion? How anybody can propose so with a straight face escapes me. To borrow such a huge extra sum would not only cause indignation in the street (‘they couldn’t borrow 10 billion for children and the sick but they can borrow twenty for their banker friends…!’) but would also make the interest rate skyrocket.

And then: we still do not know what the other big banks may need so as not to be the first domino of the lot to tumble… At present there is an independent audit of the banks in progress, whose results are expected at the end of the month. But, just to paint the picture, let me tell you that yesterday Emilio Botín, Spain’s foremost banker, in a message meant to calm the markets, mentioned that the Spanish banking system is in fine health, and that only a few banks will need a little help: to wit some 40 billion in total… Mere small change in the eyes of our present economic leadership. Never mind that such a sum would feed the whole of hungry Africa for a about century. And this then is the optimistic version of the tale…

In short: borrowing these sums is unthinkable. So we have to look for other ways of getting that money, from elsewhere, from others. All sorts of ingenious schemes have already been proposed. One tricky one had it that the government was simply going to give Bankia 19 billion in government bonds, which it could then use as collateral to secure loans from the ECB. However, since this is practically the same as printing phoney money out of nowhere, the ECB balked and refused. For once I cannot blame them.

Another option would be to ask the (temporary) EFSF or the (coming) ESM for a bail out, but that is far from ideal. You see: if Spain does so, she would – according to the treaty rules - immediately be placed into receivership of the Greek kind, which nobody wants, if only because it would lethally undermine the famous Confidence in the country, and in its wake the Confidence in the entire Eurozone, Euro and EU. This would pretty much be the end of it all.

Hence the present hectic attempts to bend the rules yet again, by somehow allowing some financial body (the ESM, the IMF, the EU itself, the ECB, whoever) to lend the bail out sum directly to the banks in question. That is to say: in such a way that the Spanish government is no party to the deal, and will not be faced with treaty consequences. The Spanish vice-president Soraya Sanz has already gone talking about the scheme with Femme de Fer Lagarde of the IMF, and the US Treasury Department; and there have been talks with Brussels and Berlin, and everybody is warming to the notion. And so we muddle on, inventing new billion-dollar mechanisms clad in rigorously strict rules to guarantee equity and good governance, which rules we then need to break as soon as reality catches up with us, which is another reason to invent a new European financial institution, clad in… ad infinitum!

The other day my dear goddaughter Ivana asked me why I got so worked up about the EU and the Euro. I sounded, she said, like a grumpy nostalgic old man with a bad digestion and an ugly mania. I’m sure I do. Sound like that, I mean. But deep down inside my ire is justified. For the Euro, dear reader, has turned out to be a toxic currency. It is not the powerhouse, but the venom of our economies. It did not CAUSE the crisis, but did nothing to avoid or alleviate it. And now that we suffer the slump, it stands squarely in the way of prescribed solutions and crisis management. Hence my loathing of the wicked coin.

It has been said many times before by people wiser than myself: the Euro was not so much an economic instrument as a political one. Its introduction was one step towards – obligatory - further European integration. Now prick up your ears if you please, for I am coming out with a Statement which surely will surprise you. Alfred B. Mittington is not an opponent of further European Integration. Yes, please read that sentence again. He is NOT an OPPONENT of the U.S.E.! But: he wants that integration realized through fully democratic processes, with a fully democratic political system at the end of the line. And he thinks that the means to reach that integration should never endanger the livelihood, economy or freedoms of the European people(s). Today’s Euro is clearly no part of that. Nor is the present European leadership, its arrogant and overpaid bureaucracy, or its 734 well-paid loafers in the European Parliament (I am not counting Nigel Farage here, or the late Miguel Portas from Portugal, both of them honourable men, in my opinion; and there may be a handful more of which I am unaware).

The late Miguel Portas, an honest Euro MP

Where will it all end? Well: somebody will have to pay for the bail-out of the Spanish banks (and probably the Italian ones as well, because anyone who believes that Italy is doing splendidly well with Mr Monti shaking miracles out of his high banker’s hat is a greater optimist than the fellow who designed the Titanic…). I guess we are looking at a fair 100 or 150 billion for Spain at least.

Who will pay for it is another matter. It may be the poor, the sick, and the children of the Mediterranean if we do what Olli Reign, Ali Babarroso, Haiku Herman, the BCE Draghon and the IMF’s Iron Lady in Vuitton shawls are concerned. It may be the German taxpayer if President François ‘Go Dutch’ Hollande gets his way. It may be yet somebody else whom we have not yet discovered. But in the end, believe me: we are all in this together and we will all pay for it one way or another, in money, unemployment, freedoms or future, unless we set up that Guillotine in front of the offices of the EU, the BCE, the IMF and the European Parliament, and tell our bungling leaders with a single voice: No, not to the throne, but to that scaffold, is where you will go unless you clean up your act, and soon!

Next Thursday is the crucial date for now. Then Spain, for the first time since the Bankia news broke, will try to secure 3-year, 4-year and 10-year loans for a fair interest rate. If that fails, if the interest rises even higher than the present 6.5 %, it is a Day of Truth. If it succeeds, we will have a Day of Truce until the 17th, when the Greeks elect a new parliament, dear readers.

Ah, we are living in Interesting Times! (But just to be on the safe side: do stock up on petrol and dry beans, I say!)


  1. I'm no expert on the political or socio-economic situation but here's my recommendation:

    Spain should sell off the Balearic Islands, the Canary Islands and Ceuta and Melilla, the two autonomous cities that border Morocco... and even the enclave of Llívia situated inside French territory should be up for sale - to the highest bidders.

    I wonder if that is possible and how much money they'd make.

  2. My dear girl, where do you get it all from??? I've been living in the Peninsula for decades, and NEVER heard of Llivia...!

    Unfortunately your proposal is doomed to failure. Granted: the Germans might just be interest in buying the Balearic islands (they already own half of it), but the native population might just not be too happy with the prospect. Ibid the Canary Islands. As for Llivia: the Catalans would balk at the idea, because this enclave is part of the Greater Catalunya, which includes the Spanish province of that name and the French province right above it, which must all be combined to form the future new nation of the Republic of Catalonia... Ceuta and Melilla? Morocco won't pay a cent for it, since they claim it is already theirs by right, even if it isn't in their possession at present. And so on...

    Lastly, the decision to sell all these territories claimed by strongly separatist peripheral nations would be taken by the central Spanish government based on Madrid, to the benefit of the State of Spain. Civil Wars have broken out over less in this country! So please do not give Mr Rajoy any ideas! The place is in enough trouble as it is!

    Yours, ABM

  3. Well Mr. Mittington, I credit my seemingly endless bouts of curiosity (and an equal amount of enthusiasm for research - the one area in my life where I don't give in to laziness) for the amount of useless information I tend to cultivate.

    Perhaps I'm an optimistic fool, which is most likely. But let me elaborate on my recommendation:

    I was thinking more along the lines of foreign investment, since the EU is in enough trouble and cannot bail itself out. Due to the complexity of the situation (and its location) Llivia could be excluded from this plan and left to be. However, in my opinion, there's no reason Ceuta and Melilla can't be sold off to one of the richest nations i.e. Qatar since the Qatari government has more money than they spend and they also have a penchant for acquiring such things (which is the reason they own a hefty chunk of the UK, London in particular)... and then let Morocco and Qatar hackle over territory...

    The Spanish residents in both Ceuta and Melilla can be given the option of returning to the Motherland where they can be assimilated into whatever region they choose - or they can become citizens of Qatar - reaping incentives akin to the people of Brunei.

    The same would go for the Balearic and Canary Islands.

    Since the British is all too keen on acquiring more land (aka the Falklands), why not use that time, money and effort into acquiring the Balearic and Canary Islands? Would it not be better to own something closer to home? And again, residents could choose to leave for the Motherland or become British Nationals.

    Anyway, as far as drastic measures go, it would seem the safest option. Or maybe not. I'm aware that there'd be quite an uproar.

  4. Errr. . . While most of us would happily let them go, the Falkland islands already belong to Britain. Treaty of Utrecht, 1813, I think. Or is that Gib? Another place most of us would happily let go of.

  5. Dear Ms Azra,

    Well, you obviously suffer from that most deadly virtue of the young: optimism! Which is why you take a most rosy and logical view of things, in which neat ideas are necessarily appreciated by all reasonable human beings. Need I say it? Experience has taught me that humans do not work that way. At all.

    Your Qatar proposal is a fun plan which indeed might work if accepted. But it will not, for the simple reason that pride, patriotism and the sense of property would immediately flame up once it were proposed. I can just hear the outcry from Ceuta and Melilla residents: 'What? We either must become Moors or leave the birthplace that is ours?' And they would not be totally wrong. After all: forcing people to make a choice (even between two good things) is not completely the same as true Freedom.

    Lastly (and this one is for dear Colin as well): claims to territory by nation states are rarely - if ever - about the well-being of the local residents. That is merely the good pretext for a refusal to budge. It is about mineral resources and geo-political advantages. The Falklands sit on oil. Gibraltar controls the entrance to the Mediterranean. And so on and so forth. One does not sell such things for mere money.

    Greetings to you both, Al B.M.