Following suicides, Spain Prime Minister to halt evictions

Bloomberg reports that Spain's Prime Minister is going to halt evictions while it tries to come up with a solution that allows families to stay in their homes following several recent suicides.

The Spanish people are experiencing “terrible things and inhumane situations,” the premier said at an election rally in Lerida, Catalonia last night. The government “will defend the most vulnerable families affected by the evictions and act with seriousness, sensitivity and great humanity,” he said.

Amaya Egana Chopitea, 53, threw herself from the window of her apartment when representatives of Spanish bank La Caixa arrived with locksmiths to evict her yesterday morning, El Mundo reported. Egana and her husband’s mortgage debt of 164,000 euros ($208,640) rose to 213,000 euros because of charges and interest payments, while their home had been auctioned for 190,000 euros, the newspaper said. 

Rajoy is searching for a formula that can help families that have fallen behind on mortgage payments without increasing the strain on lenders trying to clean up about 180 billion euros of bad real estate assets, the legacy of a 10-year building boom.

Rajoy faces a simple choice:  protect the Spanish society or bank book capital levels and banker bonuses.

This is a choice between adopting the Swedish Model or continuing to implement the Japanese Model for handling a bank solvency led financial crisis.

Under the Swedish Model, Rajoy would require the banks to absorb upfront all the losses they will ultimately absorb by going through the long process of default and foreclosure.  This keeps families in their homes and protects the real economy.

Under the Japanese Model, Rajoy would continue to protect bank book capital levels and banker bonuses and continue to allow Spain's real economy to crumble under the burden of this excess debt.

Regular readers know that a modern financial system, like Spain's, is designed so that Rajoy can adopt the Swedish Model.  Banks can continue to operate and support the real economy even when they have low or negative book capital levels.

The reason banks can do this is the combination of deposit guarantees and access to central bank funding.  The deposit guarantees make the Spanish taxpayers the banks' silent equity partners when they have low or negative book capital levels.

At the beginning of the current financial crisis, Iceland put its society ahead of preserving bank book capital levels and banker bonuses.  The result is they protected their real economy and have not suffered the "terrible things and inhumane situations" that have been inflicted on the Spanish people.

Your humble blogger hopes that the suicides spur Rajoy to adopt the Swedish Model.