The Bailout Of Spain – OpEd

“The burden of recapitalizing insolvent banks or loss-making acquisitions of solvent banks will fall on Spanish citizens.” – Karl Whelan, economist at University College, Dublin.

Before EU finance ministers approve the 100 billion euro bailout for Spain, they might want to ask themselves one question: Will it really help?

Sure, it’ll keep the markets bubbly until mid-week when fears of the Greek elections set in, (June 17) but that’s about it. It won’t fix the eurozone’s underlying problems, in fact, it doesn’t even address them. The narrow purpose of the bailout is to keep insolvent banks propped up to avoid another Lehman Brothers-type catastrophe. That’s it. In other words, the 100 billion will not boost competitiveness, spur growth, reduce unemployment, or increase fiscal and political integration. It doesn’t do any of these things, in fact, Spain’s debt-to-GDP ratio will widen even more due to the new burden its leaders have taken on. That means, Spain’s working people will have to endure even harsher conditions for a longer period of time to repay the obligations assumed by Madrid. How does that help?

The Eurogroup has agreed to lend Spain 100 billion, but they have no way of knowing how much more the country will need in the future. Just take a look at this and you’ll see what I mean:

“Spain’s banks have over €300 billion in exposure to the real-estate sector, mostly through loans to developers. Around €180 billion of this exposure is considered “problematic” by Spain’s central bank.

Estimates suggest that there are about 700,000 vacant newly built homes, but including repossessed properties the total could be as high as one million or even higher. At current sales levels, it will take many years to clear the backlog, which will be compounded by more properties being completed and coming onto the market. Housing prices have fallen by 15-20% but are forecast to fall eventually by as much as 50-60%. A severe recession and unemployment of 25% means that losses on Spain’s over €600 billion of home mortgages loans are likely to also rise.” (“The Spanish “Bailout”, Whoops – “Assistance”!, Satyajit Das, Naked Capitalism)

Housing prices have a long way to fall which means the slump is going to drag on indefinitely putting more pressure on bank balance sheets. Expect more bailouts to come. The 100 billion is just the tip of the iceberg.

And, keep in mind,  the bailout will not ease credit conditions either. The money will be used to roll over debt, and to restructure and recapitalize underwater banks. The truth is, that none of the bailouts have eased credit conditions. Even after the ECB launched its trillion euro Long-Term Refinancing Operation (LTRO)–which provided 3-year, low interest loans to financial institutions– lending is still in the doldrums with no sign of improvement. So, don’t expect the bailout lead to another expansion.

The same rule applies to borrowing costs. The bailout  doesn’t ensure that yields on Spain’s debt will fall or that the ratings agencies won’t continue to downgrade its banks and sovereign bonds. (which will make borrowing more expensive) In fact, adding 100 billion to the country’s debt load will probably trigger more downgrades, lowering Spanish debt to junk status.

Finally, the bailout will not stop the slow-motion bank run that’s seen 100 billion euros exit Spain in the last year. (How’s that for symmetry?) The country is borrowing the exact same amount that it’s lost due to the flawed architecture of the eurozone which does not provide blanket guarantees on deposits.

Here’s an excerpt from the Eurogroup’s statement on Spain:

“The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect….

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total….

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.”

So, Prime Minister Mariano “We don’t need help” Rajoy will have accept an IMF monitoring team that will sift through the books of distressed Spanish banks and expose the boundless red ink and corruption that lies therein. The involvement of the IMF means that a lot of shareholders are going to be wiped out while bondholders take severe haircuts.

Spain will now join the other bailout-dependent countries, Greece, Portugal and Ireland, although it will not be asked to increase austerity measures which Rajoy has already implemented with gusto. With the economy already in deep recession and unemployment tipping 25 percent, EZ finance ministers believe that more belt tightening would be counterproductive. Accordingly, the European Commission has agreed that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of GDP. Here’s how Greek economist Yanis Varoufakis summed up recent developments in Spain:

“Spain’s current predicament is instructive: To get money to give to its decrepit banks, the nation must be humiliated and undergo further fiscal waterboarding so that Italy and others are deterred from turning to the EFSF (European Financial Stability Facility) for help. In this sense, when Europe’s functionaries say that there is no need for further action on Spain since the EFSF is available to help, they are inviting the Spanish to enter the Workhouse for a life of undeserved misery on behalf of their bankers. And they have the audacity to call this ‘solidarity’ with the Spanish people.” (“Solidarity Euro-Style: Finnish loans, ECB bond purchases, EFSF tough love and assorted horror stories from the postmodern Euro-Workhouse”, Yanis Varoufakis)

The Spanish bank bailout is only going to make matters worse for working people who’ll see the losses of corrupt financial institutions heaped onto their shoulders via higher taxes, cuts to social programs, and a firesale of publicly owned assets. They’ll pay the price while the crooks walk away scot-free.