“I'm going to see the European cup having resolved the situation,” claimed Spanish Prime Minister Mariano Rajoy, after a bailout of the country's banks worth up to €100 billion was announced. The Spanish team drew, but the Spanish people continue to lose -- paying for a crisis that has left them with “not much bread, and terrible circus” (Poco pan y pésimo circo), in the words of a Spanish rap-rock song that sounds more apt today than when it was recorded over 15 years ago.
To understand why, it's important to unravel the pollyannaish rhetoric of a “victory” that delivers the “aid” to “rescue” Spain, accompanied by talk of a strengthened and more “credible” Euro. The bailout of up to €100 billion is not “aid” to Spanish banks. It is a loan and will need to be paid back.
The money will come from the European Financial Stability Facility (EFSF) and/or its successor, the European Stability Mechanism (ESM), which is due to begin in July 2012 (although it has yet to be ratified by Germany). The loan payments will go directly to the Spanish state's “Fund for Orderly Bank Restructuring” (FROB, Fondo de Reestructuración Ordenada Bancaria), which will then recapitalise failing banks - in effect, nationalising their liabilities.
Significant action to “rescue” and reform Spain's banking system is painfully necessary -- although key questions remain about who or what is rescued, by whom, and with what conditions. As things stand, a growing number of the country's banks are falling short of their capital requirements, most notably the current or former cajas -- regional savings banks that are similar to building societies in the UK or savings and loans in the USA. This means they lack the minimum amount of money that international banking regulations (Basel II) say they need to hold onto relative to the amount that they have lent out in order to remain solvent.
Put simply, this part of the Spanish banking system risks collapse, which could leave millions of ordinary savers out of pocket and therefore knocking at the door of the Fondos de Garantía de Depósitos (FGD), the fund that guarantees savings up to €100,000. But the Spanish government doesn't really have the money to underwrite this fund in the case of a run on the banks, which could become a self-fulfilling prophecy if enough savers lose faith that their money is secure and so remove it from the Spanish banking system. That's already happening, in fact, with about €100 billion withdrawn from Spanish banks already this year. But with total deposits of $1.25 trillion, the situation could get a whole lot worse.
At first glance, what's on offer for Spain looks “better” than what Greece, Portugal and Ireland got -- with the major proviso that there may be many devils lurking in the details of the agreement that are yet to emerge. What it looks like so far is that the FROB will get loans at 3 to 4 per cent interest, which is better than the market rate for Spanish government borrowing in a situation of good money is chasing bad.
If there is a glimmer of good news in all of this, from the perspective of austerity's opponents, it is that the differential treatment of Spain and Greece shows that the anti-austerity Syriza coalition in Greece is right in its assessment that the “memorandum” under which Greece's second bailout was agreed is unfair. That, in turn, could yet boost the party's support in next week's Greek election.
But there remains plenty of bad news for the Spanish people to swallow. The fundamental fact remains that the “bailout” amounts to loans of up to €100 billion which will need to be repaid, potentially impoverishing the country for generations, while leading to more cuts and tax increases in the short to medium term. As Democracy Real Ya, a network that has been instrumental in the Spanish indignados movements of the past year, wrote in its assessment of the bailout, this debt burden (like that loaded onto Africa) makes the country a “slave of interest payments so high that everything goes to repaying them,” with the result that wealth is privatised, and workers are exploited even further.
Spanish prime minister Mariano Rajoy is currently crowing that he has successfully negotiated a “soft loan” rather than a bailout -- and while this may turn out to be technically correct, it is a smokescreen. The “bailout” probably won't work for the Spanish banks, and almost certainly won't help the Spanish state, the Spanish people, or the Eurozone as a whole. It simply kicks the financial can a short way down the road, delaying the collapse of the Spanish banking system for long enough that international investors, most notably German and French banks, can withdraw their money. We've been here before with the other “bailouts”.
A loan to the FROB is still a loan guaranteed by the Spanish state and, as such, it is money added to the Spanish sovereign debt. Moreover, if the lending comes from the ESM, then this will be treated as a “preferential” creditor -- in other words, the one that is paid back first if there's a default. The markets call this the “subordination” of Spanish government bondholders, meaning they have just slipped down the priority list of creditors. That's likely to increase the cost of Spanish borrowing, since it has become riskier. Yet the rising costs of Spanish debt are a key contributor to the current crisis.
In response, markets are likely to see a sell off of even more Spanish debt, with investors concerned that the bailout marks the start of a road that leads to a “haircut” that would leave them sitting on massive losses. The partial exception here is Spanish investors (mostly banks, pension funds and insurance companies), which own 67 per cent of Spanish government bonds, a share that could well continue rising.
The bailout doesn't change the spiral that was revealed with the recapitalisation of Bankia last month itself. Bankia itself was a forced merger between several cajas, the largest of which had close ties to politicians from the ruling, right-wing Partido Popular. It first requested a €4.5 billion rescue, but in the course of a few weeks that figure rose to another €19 billion. Other cajas are now lining up for similar rescues.
Michael Hewson, senior analyst at CMC markets, aptly described the Bankia bailout as “akin to 2 drunks propping each other up”. Little has changed with the European bailout. Spanish banks are being rescued by increasing Spanish sovereign debt, which is finding fewer and fewer buyers outside of the Spanish banks themselves. As Spanish bonds become more risky, property prices fall, and bank deposits moving elsewhere, the €100 billion could even be an under-estimate.
Spanish banks and government may stumble on for a little longer, but none of the economic fundamentals have been changed by bailing out the banks. Structural inequalities in the Eurozone rendered Spain uncompetitive with Germany, which has been the biggest winner of a monetary policy set by the Frankfurt-based European Central Bank. The housing bubble temporarily masked this weakness, providing a source of growth in the boom years at the start of the century. But unemployment shot up when the bubble burst, and now stands above 24 per cent. The figure runs to over 50 per cent for under 24s, while the generation of 25-34 year olds were dubbed mileuristas, earning €1000 per month (despite holding one or more degrees), which is barely enough to cover sharply increasing living costs. Meanwhile, wage deflation is pushing the mileuristas' income still lower.
These problems have been compounded by some of the harshest austerity policies in Europe, with spending cuts decimating health and education, and tax increases that do more to harm the poor than the rich. Spain may have avoided IMF loans and their punitive “conditionalities” for now, but its government is already administering IMF-style structural adjustments.
These include labour law reforms, which came into effect in February 2012, that make it easier to fire people. This was sold as a measure to make employers willing to risk taking on more people. In practice, unemployment continues to increase (despite a small seasonal reduction in the last month, related to the start of the tourist season), while those with jobs face ever more precarious conditions.
Austerity as a whole has proven to be a disaster: crashing the economy into another recession, compounding unemployment and decimating health and education services. It is also self-defeating, reducing tax revenues to the state and thereby worsening the sovereign debt crisis. The result is fiscal heroin: worsening finances leading to greater dependencies on the Eurozone creditors (and, ultimately, the IMF) who claim to be Spain's saviours. Spain remains firmly on course to miss its deficit-reduction target.
The underlying problems with the Spanish banks, meanwhile, remain unaddressed. The majority of the current and former cajas are insolvent, having pumped up a massive property bubble. The real culprit here is a form of crony capitalism, in which political appointees from the country's two main parties (the governing right-wing Partido Popular, and the centre-left PSOE opposition) governed the cajas, lending irresponsibly to bolster their local prestige and pocket huge bonuses (and kickbacks) from property deals. This rendered the cajas vulnerable, and when the European economy hit a crisis, the bubble burst.
The banks then masked this problem by manipulating the value of the property on their books -- engaging in a series of evictions, but then keeping huge stocks of unsold property on their books so as to not have to write down the actual value of their liabilities. The recapitalisation of Bankia eased open the lid on this practice, and the current bailout (in anticipation of audits by the IMF and Spanish state) are lifting it right off.
The bankers have walked away with huge bonuses, while over 400,000 families have lost their homes but face continued repayments on properties they no longer own. And yet, astonishingly, no one has been held accountable and Spanish politicians, notably the governing PP, are blocking investigations. A proper investigation, as is demanded by the Spanish indignado movements, could contribute to a collapse in confidence in the two-party system. Many in the movements (including myself) would argue that's a good thing, and one which should be accompanied by taxation and legal cases that target the “1 per cent” from the political and banking elites who caused the crisis.
But the bailout's effects are not simply limited to Spain. In the short term, measures to shore up the Spanish banks are likely to lead to renewed pressure on the Italian government, widely viewed by markets as the next domino in line for collapse. That, in turn, would require that the Eurozone finally faces up to its existential crisis, since the ESM (and even less so the EFSF) simply do not have the funds to cope with the “bailout” of Italy and Spain, the region's third and fourth largest economies. In short, this looks like the endgame for the Eurozone in its current form.
There are still ways out of the immediate crisis, even within the limited terms of economic theory. The ECB could act as a lender of last resort; European-wide bonds could finally be issued, in recognition that the whole of the Eurozone bears responsibility for the problems afflicting Southern Europe and Ireland. Martin Wolf of the Financial Times, an orthodox cheerleader for globalisation in the boom years, has consistently called the European crisis right, and was insightful once again in an editorial comment last week:
"Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it."
In the eurozone, they are failing to do so. If those with good credit refuse to support those under pressure, when the latter cannot save themselves, the system will surely perish. Nobody knows what damage this would do to the world economy. But who wants to find out?
The rhetoric coming from Berlin, and some other northern European capitals, suggests that we are about to find out. Any “rescue” worth its salt has to be European-wide or not at all, and until that happens then the bailouts are going to be part of the problem and not the solution. At this point, the best bargaining chip that Spain and other southern European countries have is that the debts are big enough to collapse the whole Eurozone system -- and Europe-wide solidarity and responsibility.
Inside Spain, meanwhile, there's a stronger desire than ever for the crony capitalists and politicians to be held responsible. Advocating a Europeanisation of the debt only addresses the crisis but, as the indignados have repeatedly claimed, No es la crisis, es el sistema (it's not the crisis, it is the system). In the short term, politicians rescuing cajas that failed in large part due to the shoddy lending practices exacerbated by management boards stuffed with political appointees. The state then takes responsibility for their debts, in the process taking on more debt, with an eye to then selling on the newly “clean” banks to the private sector.
This was how the Bankia bailout was meant to work and, astonishingly, the same idea still holds sway. The losses are paid for with public money, yet any benefits go into private hands. Meanwhile, the financial system goes on much as before, creating new incentives for speculative wealth and crony capitalism while the majority of people are left to pay to clean up the mess.
What is needed, instead, is the reverse -- a financial system that is accountable to people, not financial speculators or corrupt politicians and bankers. That means a “clean up” that identifies the responsibility of politicians and the bankers themselves and makes them culpable, both in terms of windfall taxes to recuperate money, and in front of courts of law. This requires debt audits to identify responsibility for damaging lending practices and criminal charges for the bankers who cooked the books.
None of this is likely to be granted easily by the bankers and politicians who got us into this mess. But as the streets start to echo once more with the sound of banging pots and pans, it's time to revive the slogan that accompanied the caceroladas in Argentina: “Kick them all out, not a single one should stay.”
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Republished with permission of Foreign Policy in Focus