Price of dwellings fell in April
The price of dwellings fell 12.5% in April, compared with the same month last year. The fall was 14.3% on the Mediterranean coast and 13.7 in the bigger cities.
More families and companies go bankrupt
With 2,224 declarations, the number of families and companies declaring themselves bankrupt increased by 21.5% in the first quarter, compared with last year. Among the business affected, one third were in the property sector. The worst hit regions were Catalonia, Madrid, the Valencia Region and Andalusia.
Dark view of situation in Spain
According to a government opinion poll, 90% of the population consider the economic situation in Spain to be bad or very bad and 60% hold the same view of the political situation; 5.6% expressed reasonable confidence in Prime Minister Rajoy, 20.6% were less confident, whilst 31.7% had little confidence in him and 39.9% none.
Madrid sells 9,144 dwellings
The municipal Institute of Dwellings in the Region of Madrid, IVIMA, has decided to sell 9,155 dwellings to the present tenants at a average price of 55,000 euros, with a bank arranging mortgages. IVIMA owns 23,563 dwellings. The offer goes to tenants who have been paying their rents for 11 years.
Catalonia reintroduces inheritance tax
The leader of the governing nationalists in the Catalan Parliament, Oriol Pujol, has declared that the region may re-introduce the inheritance tax that was abolished in 2011, with the support of the regional PP.
It is to be expected other regions will follow suit.
Unemployment falls in April
Unemployment fell by 6,632 in April, due to an increase in the number of tourists over Easter. A fall in April is normal, however, this year it was smaller than the 34,309 last year.
One in every three unemployed in the Euro Zone are in Spain.
6,000 journalists out of work
More than 6,000 journalists have lost their jobs during the past 3 years. ‘It is the most severe situation journalism in Spain has gone through in all its history,’ said Elsa Gonzalez, President of the Spanish Federation of Journalists. She added that the figures for the last quarter are alarming and the outlook is dark.
Government favouring banks and developers
The Government intends to change the Law on Land Use to avoid land which has been approved for construction being expropriated and sold as farm land. The change will place the value of the land at a level similar to that, which such land in the same area has been sold for. Without the change, the land would be sold as farmland, meaning, in most cases, for next to nothing.
The Government is supporting the banks and the developers, the two groups responsible for the property crash.
Government take back the rivers
The Government has taken back the responsibility for rivers which Ex Premier Zapatero passed to the regions. Since most Spanish rivers flow through several regions, this is a logical step.
Car sector in ditch
Last year was the second worst in the history of the car industry, when only 808,000 vehicles were sold, but this year looks even worse. In April registrations fell 21.7% compared with the same month last year, with many of the purchases being made by the car dealers themselves, selling cars with ‘0’ kilometres on the tachometer at reduced prices.
Industrial production down 10.4%
In March industrial production fell 10.4% compared with the same month last year. The steel and iron sector dropped 22%, metal elements for the building industry 39.5% and car production 17.9.
Government studying selling its buildings
The Government is studying selling some of its 53,662 buildings to save costs and help bringing down the deficit; 67% of them are agricultural, 26% buildings and 7% is building land.
CO2 increasing
According to the Ministry of Agriculture, industrial and energy sector carbon dioxide emissions (CO2) increased 9.2% in 2011. Spain is having difficulty in complying with the Kyoto protocol on reduction of noxious gases.
Illegal subsidies to film studios
The European Commission has found that subsidies given by the Valencia Regional Government to the ‘Ciudad de Luz’ film studios in Alicante are illegal; 265 million euros must be returned.
Crisis of the week
After the victory of socialist Francois Hollande in the French Presidential elections, the policy of hard budgetary cuts has lost support in the Euro Zone, giving way to incentives for increasing economic activity.
Greece was again at the centre of attention after a majority of voters in the parliamentary elections supported parties which are opposed to the hard conditions of the rescue operation; new elections can be expected.
The Spanish government has decided to rescue the wobbling Bankia bank, the third biggest in Spain with an injection of 7,000 million euros. The bank was given 4,456 million a few years ago. Bankia has 37,500 millions invested in shaky property loans. Accounting company Deloitte has found overvaluation of 3,500 million euros in the accounts.
The country risk of Spain stood on Wednesday morning at 436 points and the interest rate on 10 years bonds was 6%. The IBEX fell 2.18 points to 6.854.
When Spain goes bust. By Per Svensson
Experts and commentators take it for granted that Spain will at some point during this year be unable to meet its financial commitments, that the markets will not be willing to buy unsafe public bonds anymore, not even at 6% interest, and that a number of banks will close their doors due to lack of credits and deposits from clients.
The Rajoy government will go on cutting the income and living standard of Spanish families, at the same time as taxes, charges and costs soar. The result being a deepening recession of the Spanish economy, and falling consumption, leading to less tax income and thus the subsequent shrinking of public services.
We have asked ourselves how such a situation may affect the many foreign property owners in Spain, and have reached the following conclusions:
More and higher taxes
All taxes and charges will increase, and new ones will be devised, at the state level, by the regions and municipalities. Spain will become a country with one of the highest tax level in Europe (see report of last week).
Life more expensive
As domestic consumption fall and less people can afford to go out for a beer or a meal, prices in the surviving restaurants and bars will increase. Spanish businesses have a habit of compensating lower turnover with higher prices!
Hiding the money
The banks are scrambling to find new sources of income, mainly based on the money clients have deposited with them. A modest deposit may be eroded by all kind of new or higher charges. Many foreigners have taken their money out of the country (remember Argentine!).
When Spain goes bust, there may not be sufficient funds available in Europe for a rescue package. You may find that the Bank of Spain cannot honour the guarantee on deposits when a number of banks go bust simultaneously.
Pensions in danger.
Some foreigners have Spanish pensions from working in Spain. They must be aware that contributions to the social security systems have been falling and the number of
pension payments increasing over the recent past due to the Spanish population growing older. The funds of the SSS have partly been invested in Government bonds (!) and in a real crash there will be no money in the treasury to pay the monthly cheques ……
More expensive health
Already Regional government’s health services are being reduced, with a fee being charged visiting the doctor and part payment for medicines and treatments. A national financial crisis will also affect the regional health services and probably the first to be placed on waiting list to see a specialist or have an intervention in hospital, will be ‘foreigners.’
Non-payers in Communities
As the crisis deepens, there will be more foreign and Spanish unable to pay their Community fees, leaving the bills for the necessary repair work and essential services to those better off. Seizure of debtors dwellings is both unsocial and, with the bottom having fallen out of the property market, has little effect.
Longer waiting lines
You must be prepared for longer waiting lines in the public administration, as more and more functionaries are becoming redundant and not being replaced. That goes for the police foreigners departments, if you want to renew your registration permit, or receive attention in your town hall.
You will meet some grim faces from local civil servants!
WHAT TO DO?
– Only keep the money you need for 3 months in your Spanish account.
– Consider if it is better to return the Spanish residence permit and become resident in a more stable country.
– Keep up your European Health Insurance Card, and register with a local health office in the country where you want to become resident
– If you get a pension from a country other than Spain, keep the payments on an account in that country
– If you are happy in Spain and can afford to live a more expensive life, by all means stay put
– If you have difficulties meeting ends in Spain, sell your property at any price. The prices will continue to sink and will stay at the bottom for a long time!
VALENCIAN JUNK
(Reuters) – Once the beacon of Spain’s new economic grandeur, the Mediterranean region of Valencia has become a symbol of all that is wrong with the country.
Over the last decade, surfing on a property boom, Valencia spent billions hosting the America’s Cup sailing competition and the European Grand Prix motor race, launching Hollywood-style movie studios, and building the biggest aquarium in Europe, a Sydney-style opera house and several museums.
But now years of free spending, coupled with a hangover from a burst real estate bubble and the collapse of local banks, have put Valencia on the brink of being bailed out by the central government – which has huge budget problems of its own.
The building sector’s implosion has forced into the open allegations that corrupt Valencian politicians, developers and bankers were in cahoots during a decade of easy money at low interest rates after Spain joined the euro in 1999.
Valencia and other indebted regions have become a liability for Prime Minister Mariano Rajoy, in office since December, as Spain sinks into a second recession since 2009 and investors speculate that it may follow Greece, Portugal and Ireland into the arms of an international bailout.
Valencia’s problems are particularly embarrassing for Rajoy, who has made austerity central to his policies, as his centre-right People’s Party has run the region since 1995, being re-elected four times in the process.
«They said it was all to put Valencia on the map, and that’s what they did, put us on the map, for corruption, for waste … bringing shame on Valencia,» said Ignacio Blanco, a member of the regional legislature for the leftist Esquerra Unida party.
Valencia, home to five million people, is not the only one of Spain’s 17 autonomous communities with debt problems.
Several of the regions, which account for close to half of all public spending in Spain, are facing liquidity problems and their massive overspending pushed the country’s 2011 budget deficit to 8.5 percent of gross domestic product, overshooting a 6 percent target agreed with the European Union.
VALENCIAN JUNK
Valencia can no longer borrow funds from the banks or markets. Standard and Poor’s credit agency rates Valencia’s bonds as junk and said in February that the central government would probably have to provide further extraordinary support to help the region to service its debt in 2012.
If it cannot cut its deficit drastically Valencia may become the first of the autonomous communities, which control their own health and education spending, to have its budget taken over by the central government under new austerity laws.
In January the regional government delayed a 123 million euro ($162.80 million) payment to Deutsche Bank by a week and local press reports said the central government had to underwrite the payment.
Valencia’s finance head did not respond to repeated requests for an interview on the region’s debt situation.
The Generalitat, as the Valencian government is known, is sitting on 4 billion euros in unpaid bills to street cleaners, healthcare suppliers and other providers. The central government is now providing emergency lines of credit to get the providers, many of them small companies, paid.
In return for the loans, Valencia must cut its deficit to 1.5 percent of its economic output from 3.68 percent last year.
Beyond the money owed to the providers, Valencia has 20 billion euros in other debt, the second biggest regional pile after its wealthier northern neighbour Catalonia. Valencia and Catalonia are Spain’s two most indebted regions, both with debt equalling 20 percent of their yearly economic output.
The Generalitat is drastically tightening its belt in administrative spending, as well as health and education.
In February, thousands marched in the city of Valencia, the regional capital, after students complained they had to take blankets to class because the schools could not afford to pay for heating.
Vicent Baggetto, a spokesman for the association of Valencia’s public school directors, said about 60 schools might have to close down as they are not receiving enough money from the regional government to operate properly.
«We are in a part of the tunnel where we don’t see the light, so we don’t know if we’re moving forward or backward or even if we’re moving at all,» he said,
In the hospitals, nurses and doctors complain they lack syringes and beds.
«The (central) state has to get us out of this quagmire or we won’t get out of it,» said Vicente Peiro Romero, a lawyer who acts as a spokesman for a group of 35 suppliers of material for hospitals – medical equipment, surgical gloves and the like – who have not been paid by the regional government for the last three years.
«WE DON’T NEED ANYBODY»
Last Friday the regional government raised taxes and university fees, and privatised chunks of healthcare. This followed spending cuts of about 1 billion euros announced earlier this year along with layoffs of public employees.
«We don’t need anybody to come and save us,» said Maximo Buch, Valencia’s economic councillor, when he presented plans to cut the region’s deficit.
Alfonso Grau, the head of finance for the city of Valencia, said local authorities can manage without being rescued.
«Obviously we have had to stop any investment but over the last two years we invested about 500 million euros, the normal amount for eight or nine years,» he told Reuters.
«Today we’re in shape to assume the cost of these investments, maintain our day-to-day spending and look at the future with a sense of tranquillity.»
The city of Valencia, home to one of the Mediterranean’s busiest container ports and famed for its saffron-laced paella rice dish, indulged in spending as much as the region that surrounds it. Parks, fountains and palm trees line the wide avenues of new neighbourhoods, conferring a Californian air on the ancient Roman settlement.
Valencian beach resorts such as Benidorm, a favourite with British and German tourists, are today known as much for the concrete skeletons of buildings left after financing evaporated as for their sunny weather.
Valencian savings banks, or cajas, loaned recklessly to local builders. Like other cajas all over Spain, the lenders had local politicians on their boards who steered them into development projects without managing the risk.
Banco de Valencia, a century-old lender, was rescued by the central government last year and is now being auctioned off.
Caja de Ahorros del Mediterraneo (CAM), a 135-year-old savings bank, was called «the worst of the worst» by Bank of Spain Governor Miguel Angel Fernandez Ordonez after it was also taken over in 2011 following an 8-billion euro hole in its balance sheet.
Spaniards were scandalised when it came out that CAM executives paid themselves 13.3 million euros in compensation as the company was being rescued.
And Bancaja, the largest Valencian savings bank, was forced to merge in 2010 with other cajas to form a new bank, Bankia, which is now the Spanish lender most burdened with toxic real estate assets.
A financial sector source, who asked not to be named, said that even after due diligence on Bancaja’s books, it was not until after the merger that the extent of its exposure to the property sector became clear.
«The banks are the perfect reflection of what happened in the region. Political ties and obsession with short term profit led to a mad credit policy in which no assessment of the risk was made,» said the director of a Bankia branch who asked not to be identified by name.
ROMANIAN «INTERPRETERS»
From an unused airport to overbilling during a papal visit, allegations of corruption have touched every corner of Valencian life. The president of the Generalitat, Francisco Camps, had to step down last year to face charges of accepting expensive suits in exchange for handing out government contracts. He was later acquitted.
Carlos Fabra, who served for 16 years as president of Castellon, one of the region’s three provinces, has been charged with bribery and tax fraud.
Fabra is the man behind Valencia’s most spectacular white elephant, the 150-million-euro Costa-Del-Azahar airport. «Do you like grandpa’s airport?» he asked his grandchildren at the opening last year.
«Grandpa’s airport» has yet to receive a single commercial flight.
Even Pope Benedict’s 2010 visit to Valencia was tainted. An investigating magistrate has charged local politicians and a media group with colluding to overcharge the government for sound and video system services during the visit, then sharing the extra money among themselves.
In December, the mayor of the Valencian town of Manises and head of the public water treatment company, Enrique Crespo, was charged with looting 25 million euros from the company, EMARSA. Prosecutors say the money was spent on jewellery, luxury goods and monthly meetings at four-star hotels with bills for Romanian interpreters, who were actually prostitutes.
More recently, several top officials were put under arrest for allegedly diverting money earmarked for building hospitals in poor countries.
«Creating a structure to steal money from poor children: now that is a case of complete moral bankruptcy,» said Luis Bellvis, a local economist who owns an hotel in Valencia’s old town.
Secrets of the Spanish Banking System That 99% of Analysts Fail to Grasp
Apr 30, 2012 – 12:46 PM. By: Graham Summers
Spain is a catastrophe on such a level that few analysts even grasp it.
Indeed, to fully understand just why Spain is such a catastrophe, we need to understand Spain in the context of both the EU and the global financial system.
The headline economic data points for Spain are the following:
- Spain’s economy (roughly €1 trillion) is the fourth largest in Europe and the 12th largest in the world.
- Spain sports an official Debt to GDP of 68% and a Federal Deficit between 5.3-5.8% (as we’ll soon find out the official number)
- Spain’s unemployment is currently 24%: the highest in the industrialized world.
- Unemployment for Spanish youth is 50%+: on par with that of Greece
On the surface, Spain’s debt load and deficits aren’t too bad. So we have to ask ourselves, “Why is unemployment so high and why are Spanish ten year bills approaching the dreaded 7%?” (the level at which Greece and Portugal began requesting bailouts).
The answer to these questions lies within the dirty details of Spain’s economic “boom” of the 2000s as well as its banking system.
For starters, the Spanish economic boom was a housing bubble fueled by Spain lowering its interest rates in order to enter the EU, not organic economic growth.
Moreover, Spain’s wasn’t just any old housing bubble; it was a mountain of a property bubble that made the US’s look like a small hill in comparison.
In the US during the boom years, it was common to hear of people quitting their day jobs to go into real estate. In Spain the boom was so dramatic that students actually dropped out of school to work in the real estate sector (hence the sky high unemployment rates for Spanish youth).
Spanish students weren’t the only ones going into real estate. Between 2000 and 2008, the Spanish population grew from 40 million to 45 million (a whopping 12%) as immigrants flocked to the country to get in on the boom. In fact, from 1999 to 2007, the Spanish economy accounted for more than ONE THIRD of all employment growth in the EU.
This is Spain, with a population of just 46 million, accounting for OVER ONE THIRD of the employment growth for a region of 490 million people.
This, in of itself, set Spain up for a housing bust/ banking Crisis worse than that which the US faced/continues to face. Indeed, even the headline banking data points for Spain are staggeringly bad:
- Spanish banks just drew €227 billion from the ECB in March: up almost 50% from its February borrowings
- Spanish banks account for 29% of total borrowings from the ECB
- Yields on Spanish ten years are approaching 7%: the tipping point at which Greece and other nations have requested bailouts
As bad as these numbers are, they greatly underestimate just how ugly Spain’s banking system is. The reason for this is due to the structure of the Spanish banking industry.
Spain’s banking system is split into two tiers: the large banks (Santander, BBVA) and the smaller, more territorial cajas.
The caja system dates back to the 19th century. Cajas at that time were meant to be almost akin to village or rural financial centers. As a result of this, the Spanish country is virtually saturated with them: there is approximately one caja branch for every 1,900 people in Spain. In comparison there is one bank branch for every 3,130 people in the US and one bank branch for every 6,200 people in the UK.
Now comes the bad part…
Until recently, the caja banking system was virtually unregulated. Yes, you read that correctly, until about 2010-2011 there were next no regulations for these banks (which account for 50% of all Spanish deposits). They didn’t have to reveal their loan to value ratios, the quality of collateral they took for making loans… or anything for that matter.
As one would expect, during the Spanish property boom, the cajas went nuts lending to property developers. They also found a second rapidly growing group of borrowers in the form of Spanish young adults who took advantage of new low interest rates to start buying property (prior to the housing boom, traditionally Spanish young adults lived with their parents until marriage).
In simple terms, from 2000 to 2007, the cajas were essentially an unregulated banking system that leant out money to anyone who wanted to build or buy property in Spain.
Things only got worse after the Spanish property bubble peaked in 2007. At a time when the larger Spanish banks such as Santander and BBVA read the writing on the wall and began slowing the pace of their mortgage lending, the cajas went “all in” on the housing market, offering loans to pretty much anyone with a pulse.
To give you an idea of how out of control things got in Spain, consider that in 1998, Spanish Mortgage Debt to GDP ratio was just 23% or so. By 2009 it had more than tripled to nearly 70% of GDP. By way of contrast, over the same time period, the US Mortgage Debt to GDP ratio rose from 50% to 90%. Like I wrote before, Spain’s property bubble dwarfed the US’s in relative terms.
The cajas went so crazy lending money post-2007 that by 2009 they owned 56% of all Spanish mortgages. Put another way, over HALF of the Spanish housing bubble was funded by an unregulated banking system that was lending to anyone with a pulse who could sign a contract.
Indeed, these banks became so garbage laden that a full 20% of their assets were comprised of loan payments being made by property developers. Mind, you, I’m not referring to the loans themselves (the mortgages); I’m referring to loan payments: the money developers were sending in to the banks.
To try and put this into perspective, imagine if Bank of America suddenly announced that 20% of its “assets” were payments being sent in by borrowers to cover mortgage debts. Not Treasuries, not mortgages, not loans… but payments being sent in to the bank on loans and mortgages.
This is the REAL problem with Spain’s banking system. It’s saturated with subprime and sub-subprime loans that were made during one of the biggest housing bubbles in the last 30 years.
Indeed, to give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization.
The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.
Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public’s balance sheet via partial nationalization.
On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.
Graham Summers. Chief Market Strategist
Michael Schuman commented on TIME Business:
There have been many flaws in Europe’s strategy to resolve its ongoing debt crisis: The unreasonable obsession with austerity. The persistent reluctance to commit sufficient financial resources. The stubborn rejection of important tools like eurobonds. But perhaps the most misguided notion of all was the apparent assumption among European leaders that voters would meekly accept that strategy, despite the economic suffering and social upheaval it has been creating.
That delusion was shattered on Sunday. In France, Socialist candidate François Hollande beat out Nicolas Sarkozy, one of the key architects of the euro zone’s economic policies, to become the country’s new President. Even more telling, in Greece, the two main political parties, which have supported the biting austerity program mandated by the euro zone in return for two massive bailouts, got trounced. About 60% of the vote went to smaller parties, most of which campaigned against the pledges of austerity and reform made by Athens. Most notably, support for one such party, the Coalition of the Radical Left, known as Syriza, more than tripled from the last election, making it the second largest party in parliament with one-sixth of the 300 seats.
(MORE: Socialist Hollande Defeats Sarkozy in French Election)
These electoral results spell trouble. Europe is entering a phase of political uncertainty that will almost definitely upend the current, German-backed strategy for tackling the debt crisis. In my opinion, that will cause the crisis to intensify, at least in the short term, but possibly longer, if a consensus on a new direction in the euro zone isn’t reached quickly.
Let’s take on the fallout one election at a time. First, France. Hollande’s victory will almost certainly alter the direction of economic policy in the euro zone away from the strategy imposed by Germany. Hollande is definitely not anti-euro, but he has spoken out repeatedly against the current policies used to quell the debt crisis – most importantly, the overcooked focus on austerity. Hollande made that clear even as the votes were coming in, stating that his victory brings hope that “austerity does not have to be inevitable.” His stand will have two main consequences. First, it becomes almost impossible, in my opinion, for the current austerity-only approach to the crisis to continue. Hollande has vowed to reject an agreement reached earlier this year to impose even stiffer rules and sanctions on debt and deficits in the euro zone, a cornerstone of Berlin’s anti-crisis agenda, unless a “growth pact” is also introduced. Without Hollande’s support, it is highly unlikely that Berlin can continue to ignore the bubbling uprising against austerity.
(VIDEO: Interview with Italian Prime Minister Mario Monti)
That takes us to the second consequence. Hollande’s views likely put him on a collision course with German Chancellor Angela Merkel. She has been unwilling to budge on her insistence on austerity, so Hollande’s stance could open a rift between the euro zone’s two most important members. That could alter the entire political dynamic in the euro zone. The close relationship between Merkel and Sarkozy has been the foundation of euro-zone politics, the base on which the entire crisis-busting strategy has been built. If relations between Berlin and Paris sour, or even strain, getting consensus on policy could be more difficult. Germany, too, could find itself increasingly isolated in its approach to the crisis. Hollande’s views coincide with those of the prime ministers of Italy and Spain, who have also called for renewed support for economic growth in Europe. The combined weight of three of the four largest euro zone economies is likely too great for even Merkel to ignore.
Now, to Greece, where the fallout is potentially more destabilizing. When Greece got its second, $170 billion bailout earlier this year, the main concern of policymakers and investors was that the Greek government would never be able to hold up its side of the bargain – a crushing austerity program that was tanking the Greek economy. Now, after the election results, it appears highly likely those fears will be realized. It had already proven difficult for Greece’s political establishment to press ahead with its austerity program when the parties supporting it had firm control of parliament. Now with the legislature fragmented, and with so many new members opposed to austerity, I can’t see how the current bailout package will go ahead as planned. The two biggest parties immediately called for changes to the bailout. Antonis Samaras, chief of the New Democracy party, which got the largest number of votes, said that a new government in Athens should have two aims: “For Greece to remain in the euro and to amend the terms of the loan agreements so that there is economic growth and relief for Greek society.” Meanwhile, the even more strident Syriza head Alexis Tsipras demanded the bailout agreement be tossed out altogether.
(MORE: 4 Ways the Euro Could Fail)
This political turmoil in Athens could well reignite the Greek debt crisis. If Athens refuses to abide by the existing agreements, it could restart a lengthy negotiation process with the rest of the euro zone, and heighten the risk that the bailout won’t go forward. That would again raise the specter of a full-on Greek default and exit from the euro zone.
There are also some bigger questions raised by this weekend’s election results. First of all, there appears to be a disconnect between public support for the euro in Europe and public support for the measures to save it. Most people in Europe seem to think the euro is a grand idea, but when it comes to the reforms necessary to shore up the monetary union, suddenly that support seems to drift away. It’s a form of “not-in-my-back-yard” syndrome. Making sacrifices for the euro is just fine as long as someone else is doing the sacrificing. No one wants to endure the budget cuts, wage decreases and bailout burdens of those sacrifices. Yet if the union is to continue, there is no avoiding those sacrifices. Like it or not, austerity will have to be a part of any policy agenda; so will structural reforms, like boosting labor market flexibility, that are equally unpopular. Solving the debt crisis may also entail greater financial backing by the richer countries of the zone (for a larger firewall, for instance), something they have been dodging to appease their own voters, who have been reluctant to pay up to keep the euro going. So the question is: Will voters ever support the measures necessary to fix the monetary union, and with it, Europe’s struggling economies? And if not, how can we ever escape the debt crisis? And how can the euro survive?
(MORE: How Democracy Could Destroy the Euro)
An even broader problem exposed by Europe’s elections is the glaring contradiction between electoral success and fiscal reform. Voters tend not to like the idea of big budget deficits and rising debt, but when it comes to curtailing the spending or paying the taxes necessary to put
their governments on a sounder financial footing, they reject the politicians implementing the reforms. This is a potentially impossible paradox that signals a long period of both political and economic instability in most of the world’s most advanced economies. Perhaps voters will be willing to endure higher taxes and reduced government services if they see the benefits (better economic performance) of if they believe the process is fair and equitable. But right now the democracies of the West have not discovered a way to achieve much-needed reform.
There is a silver lining here, though. The bottom line is that Europe’s incumbent politicians are being punished because the policies they have adopted to tackle the debt crisis simply are not working. The strategy has been inflicting intense economic pain on a large swath of the euro zone (Spain, Greece, Portugal, Italy) while showing few, if any, positive results. Borrowing costs remain high, economic prospects bleak. Merkel and the rest of the euro zone’s powerful have generally ignored criticism of their course, and the mounting evidence of its failure. Perhaps this democratic revolt will force positive change – the creation of a more sensible, balanced, and viable strategy that actually quells the debt crisis. If that proves true, the voters in France and Greece may have just done the global economy a big favour.
Spain to spend billions on bank rescue
(Financial Times) — Spain is planning a state bail-out of Bankia, the country’s third biggest bank by assets, in a move likely to involve the injection of billions of euros of public money into the troubled lender.
In an abrupt reversal of policy, the Spanish government, which had previously insisted that no additional state money would be needed to clean up the country’s banking sector, confirmed that an intervention was being prepared.
Soon after the news broke, Rodrigo Rato, Bankia’s executive chairman and a former International Monetary Fund managing director, resigned from the bank that had been formed in 2010 out of a merger of seven Spanish savings banks, or cajas.
Mariano Rajoy, Spain’s prime minister, said in a radio interview that the government would consider injecting state funds into the banking sector if needed.
«If it was necessary to reactivate credit, to save the Spanish financial system, I would not rule out injecting public funds, like all European countries have done,» Mr Rajoy said.
The bursting of Spain’s property bubble has seen the level of bad loans as a proportion of total lending rise to the highest level in 18 years, leaving banks managing vast portfolios of repossessed and unsold real estate, and choking off credit to an economy that is suffering its second recession in three years.
The government can deploy the state-backed Frob bank restructuring fund to pump capital into Bankia and is considering the use of contingent convertible bonds, known as cocos, an economy ministry source said.
The official would not say how much money would be needed. But Spanish press reports indicated that Bankia could receive €7bn-€10bn of additional capital. Bankia declined to comment.
Mr Rato, a former finance minister who was placed in charge of Bankia in spite of having little experience as a commercial banker, announced that he had proposed José Ignacio Goirigolzarri, former chief executive of rival BBVA, as his successor.
Mr Goirigolzarri was recommended after consultation with the Spanish government, one person close to Bankia said.
Last month, the IMF singled out Bankia as the largest risk to the stability of the Spanish banking sector, with the fund recommending that it and other banks take «swift and decisive measures to strengthen their balance sheets and improve management and governance practices».
Part of the bank was listed on the Madrid stock market last year, raising €3.3bn from private savers and Spanish institutions — a move criticised by many analysts and investors for failing to recapitalise Bankia sufficiently.
Two of Bankia’s constituent cajas, Caja Madrid and the Valencian Bancaja, have historically had strong ties to the ruling centre right Popular party of Mr Rajoy.
Bankia shares, which slid 3 per cent on the news to €2.38, have fallen 36.5 per cent since their listing last summer.
Some bankers and analysts have argued that BFA, Bankia’s parent company which controls the listed entity and houses the combined group’s worst quality assets, needs significantly more capital.
BFA said last week it had renegotiated €9.9bn of assets last year to avoid them being classified as bad loans, equivalent to 5 per cent of the bank’s €188bn loan book.
One adviser to Spanish banks and government agencies said that if the amount Madrid injected into Bankia was not sufficient, and did not involve a much improved management of its bad assets, then the plan risked achieving little.
«Just injecting capital would be the equivalent of rearranging the deck chairs on the Titanic,» the person said. «I think Spain has not admitted to itself just how weak some of its banks actually are and how serious the situation is.»
