Monday, May 28, 2012

By unnecessarily bailing out its banks, Spain runs out of money

As reported in the Telegraph by Ambrose Evans-Pritchard, Spain has run out of money as it does not have the financial capacity to bail out is banks.

The direct result of the decision to unnecessarily put capital into its banks is that Spain, like Ireland and Greece, will have to turn to the EU, ECB and IMF for funding.

Your humble blogger has consistently maintained that this decision is only beneficial for bankers.  It is truly detrimental to Spain's real economy and its citizens.

That policymakers endorse bailing out banker bonuses and hurting their citizens is not surprising.  Policymakers engage bankers and former bankers to provide advice.

By definition, bankers are great salesmen whose every utterance is 100% reflects and is focused on advancing their self-interest.  

Whether the bankers' self-interest is also in Spain or any other country's best interest is a separate question that policymakers have to answer for themselves before accepting the bankers' advice.

Since the beginning of this financial crisis, there has always been an alternative to advancing the bankers' self-interest and saving bankers' bonuses.

The alternative has been the adoption of the Swedish model with ultra transparency.  Under this policy, banks would be required to recognize all the losses hidden on and off their balance sheets.

Premier Mariano Rajoy and his inner circle have allegedly accepted that Spain will have to call on Europe's EFSF bail-out fund to rescue the banking system, even though this means subjecting his country to foreign suzerainty. 
Since it is in the bankers' interest that this occurs, you have to wonder who told the press.
Mr Rajoy denies the story, not surprisingly since it would be a devastating climb-down, and not all options are yet exhausted.
"There will not be any (outside) rescue for the Spanish banking system," he said.
Which is absolutely true if the Spanish government adopts the Swedish model with ultra transparency.
Fine, so where is the €23.5bn for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3bn, and there are many other candidates for that soup kitchen. 
Spain must somehow rustle up €20bn or more on the debt markets. This will push the budget deficit back into the danger zone, though Madrid will no doubt try to keep it off books – or seek backdoor funds from the ECB to cap borrowing costs. Nobody will be fooled....
Actually, under the Swedish model with ultra transparency, the source of the 23.5 billion euros is retention of future bank earnings.

The IIF provided a study which shows that future bank earnings would be sufficient to rebuild the Spanish banks' book capital levels after absorbing over 200 billion euros of losses in under 4 years.
This all has a very Irish feel to me, without Irish speed and transparency. Spanish taxpayers are swallowing the losses of the banking elites, sparing creditors their haircuts.
As shown by Ireland, exactly the wrong strategy.
Barclays Capital says Spain's housing crash is only half way through. Home prices will have to fall at least 20pc more to clear the 1m overhang of excess properties. If so, the banking costs for the Spanish state are going to be huge. 
The Centre for European Policy Studies in Brussels puts likely write-offs at €270bn. We could see Spain's public debt surge into triple digits in short order.
Only if Spain unnecessarily recapitalizes the banks.
A Spanish economist sent me an email over the weekend after the Bankia details came out saying: 
"It looks like game over for the sovereign and the financial sector at the same time. Unless we get a Deus ex Machina, we'll be discussing much more seriously the benefits of a return to the peseta in no time."
The Swedish model with ultra transparency solves this problem.

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