So here is the clear proposal that Iceland shows produces a healthy growing economy in under 4 years.
Step 1: Spain needs to adopt the Swedish Model for handling its bank solvency led financial crisis.
It must require that its banks absorb upfront all of the losses hidden on and off their balance sheets. These losses include both real estate and consumer debt.
Like Iceland, the size of these losses should equal what the banks would expect to lose if they went through a long debt workout process.
There are numerous benefits to Step 1 including protecting the real economy and the social programs as well as keeping people in their homes. In addition, it frees up money now being used for debt service to buy goods and services. This stimulates the economy.Step 2: Banks need to be separated into two categories.
Banks in Category I are capable of generating earnings and rebuilding their book capital levels after recognition of all their losses. Banks in Category II are not capable of generating earnings and rebuilding their book capital levels after recognition of all their losses.
Banks in Category I are left alone and required to retain 100% of pre-banker bonus earnings until they have rebuilt their book capital levels.
Banks in Category II are resolved. Losses in the resolution process should fall on equity and unsecured debt holders with one exception. Because of the moral hazard the government created by saying that the banks were solvent since the beginning of the credit crisis, retail investors should be made whole by the taxpayers.
No exception needs to be made for institutional investors in equity or unsecured debt as they have had several years to adjust their exposure to what they can afford to lose.Step 3: The Spanish government should engage in a fiscal stimulus program to give its economy a boost.
Step 4: Banks in Category I should be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
This disclosure shows market participants that the banks have cleaned up their balance sheets.
This disclosure allows market participants to independently assess the risk of investing in each bank and reopens access to both unsecured debt and equity for the banks.
This disclosure makes the banks subject to market discipline and restrains their future risk taking.My 4 step proposal is clear and has been shown to fix exactly what ails Spain.
I look forward to working with the Spanish government as they pursue this 4 step proposal.