By Enrique Clari*
The Spanish banking sector is getting used to judicial setbacks. Unfortunately, they’re not the sorts of setbacks we’d like to see. This could have been an article on the elimination of the legal privileges — e.g., the existence of a state-owned central bank in charge of bailing out its (equally) irresponsible fellows — that financial businesses are nowadays granted worldwide. Eliminating those privileges would have been a setback for the banking sector, but good for everyone else. Unfortunately, that’s not what’s been happening: no liberalization of that sort whatsoever has taken place.
Rather, several recent rulings from Spanish courts have systematically encroached on the individual’s right to contract with others — and the public opinion is gleefully celebrating their decisions.
It all started back in 2013 when the Spanish Supreme Court declared the nullity of the so-called “floor clauses,” which simply constituted a minimum level set on the payment of interests on (mortgage) loans and which were included in many of such contracts during the housing bubble. These clauses were commonly accompanied by “roof clauses,” whose content was exactly the opposite (i.e., a maximum interest rate) and yet did not experience any ban by the judicial authorities.
Thus, a contract by which two freely agreeing parties, in accordance with their personal evaluations of risk, decided to put some limit to the amount of interest that could derive from the loan, was deemed void by the Justices, since it supposedly violated Spanish consumer’s protection legislation. The key element defining the “abusive character” of floor clauses was its alleged “obscurity” or “lack of transparency,” even though signed contracts would commonly refer to those conditions in terms such as: “It is hereby established that in no case the interest rate shall be lower than 3.5% or higher than 14%.”
These rulings are forcing banks alone to bear the consequences of their costumers’ decisions when it comes to legal disputes between them. It is becoming a worrying judicial habit.
For instance, just a few days ago the same malicious “abusive” feature was interpreted by the courts to exist in a whole myriad of other contracting clauses included in mortgage loans, like multi-currency calculation of its value, the responsibility of the borrower as regards the payment of a special tax on economic activities and other legal expenditures. More recently, a judge decided for the first time to allow a debtor to turn over his house as a way to extinguish the mortgage loan without having agreed on it with the creditor.
Not surprisingly, all the above-mentioned judicial resolutions have been welcomed by the citizenry with a unanimous joyful roar in celebration of the “people’s” victory over a profiteer capitalistic elite. In that sense the court’s verdicts resemble an act of ideological revenge against the banking sector, rather than the usual result of justice administration.
True, many bankers — especially those directly coming from the public sector — were involved in grand larceny rather than in financial servicing during the boom ages. True, when the Great Recession started, the bankruptcy of their companies was not due to managerial abilities of bankers, but to taxpayers’ money. True, such outrageous events should never have taken place (and they wouldn’t in a truly free market).
And yet, neither banks nor their costumers should be seen as the central victims of these ignominious occurrences, for the greatest damage has actually been inflicted to a much blurrier concept: the rule of law. This sequence of regrettable decisions will only bring about legal uncertainty and foster irresponsibility among consumers when contracting with entrepreneurs.
The last judicial pronouncements on mortgage loans, which are now cherished as an unexpected shield granted to individuals in order to defend themselves from the hordes of rent-seeking usurers, will eventually operate against them, leading to either higher prices or a reduced quality in the services offered by financial businesses.
But the legal consequences will be even worse than such plausible economic disturbances. Freedom of contract is in clear jeopardy, since its future is in the arbitrary hands of the State. Instead of analyzing the legality of floor clauses case by case and declaring them void whenever mala fide were to be appreciated, Spanish courts have decided to forbid contracting parties to negotiate on those terms and on others akin to them.
Moreover, the impartiality that should preside over any stance in the administration of justice has been completely forsaken by the judges in these particular rulings, in connivance with misguided headlines and a rampant anti-capitalistic mentality within society. Let us just hope it is not too late for liberty to strike back.
About the author:
*Enrique Clari is a Law and Political Science student at the University of Valencia in Spain.
This article was published by The MISES Institute.