Given choice, Spain puts losses on small investors rather than banks

Once again the EU governments put protecting the banks ahead of protecting the real economy and society.

In this case, working with the EU, the Spanish government has agreed to make small investors, also known as individual who are also depositors, absorb losses in the Spanish banking system while the large investors, also known as the non-Spanish banks, are protected.

As reported by the Wall Street Journal,

Spain will be forced to give up most of the control over its banks to European institutions—and will be required to impose losses on local investors—in return for a bailout of as much as €100 billion ($123 billion), according to the draft agreement accompanying the rescue. 

The requirements, some of which could prove to be explosive politically, suggest that holders of junior bonds and preferred shares issued by bailed-out banks will incur losses. 

Analysts said a significant proportion of such investors in Spain are small depositors who bought the securities through the banks' branches....

"Senior bondholders within and outside of Spain may be protected whereas pensioners and the little guy who were sold these securities may have to bear a larger share of the burden," said Sony Kapoor, managing director of economic think tank Re-define. 

Spanish Finance Minister Luis de Guindos on Monday declined to confirm that retail investors who own preferred shares will be hit by losses, but also didn't rule it out. 

The bailout deal has "no explicit reference" to preferred shares, he told reporters in Brussels, where he discussed the deal with his euro-zone counterparts.

Needless to say, pursuing this policy is only good for the banks.  This is not surprising as the EU and Spanish governments are being advised by bankers.

Bankers?  Yes, bankers from the very same organizations that manipulated the Libor interest rate.

Manipulated Libor?  Yes, bankers from the very same organizations that agreed that they lied to enhance their profitability and project an image of financial stability.

If they lied about Libor to enhance their profitability and project an image of financial stability, ...?  Yes, it is very well known that everything that a banker says is good for the banker.  The question that has to be asked after a banker speaks is 'is what the banker said good for anyone else!'

For example, since the beginning of the financial crisis, bankers have advised governments to adopt the Japanese model for handling a bank solvency led financial crisis.  They have argued that protecting bank book capital levels is important as without a positive capital level the banks cannot make loans.

Regular readers know that this is 100% good for bankers (they keep collecting those big bonuses).  Regular readers also know this is 100% bad for everyone else (unless of course you are a politician or financial regulator who anticipates getting a cushy job, say a part-time gig as a senior advisor paying 2.5 million pounds per year).

Finally, regular readers know that the modern financial system is designed so that banks can protect the real economy by absorbing all the losses on the excesses in the financial system and still continue to make loans.

In fact, the modern financial system with deposit guarantees and access to central bank funding is designed so that banks can operate with negative book capital levels.  This makes governments bailing out banks 100% unnecessary.

Why are governments taking advice from confessed liars?