http://www.nytimes.com/2012/06/11/opinion/krugman-another-bank-bailout.html?partner=rssnyt&emc=rss
"Oh, wow — another bank bailout, this time in Spain. Who could have predicted that? The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed.
Just to be clear, Spanish banks did indeed need a bailout. Spain was clearly on the edge of a “doom loop” — a well-understood process in which concern about banks’ solvency forces the banks to sell assets, which drives down the prices of those assets, which makes people even more worried about solvency. Governments can stop such doom loops with an infusion of cash; in this case, however, the Spanish government’s own solvency is in question, so the cash had to come from a broader European fund.
So there’s nothing necessarily wrong with this latest bailout (although a lot depends on the details). What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless.
Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move.
And that doesn’t even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and “internal devaluation,” which basically means cutting wages. It’s now completely clear that this strategy can’t work unless there is strong growth and, yes, a moderate amount of inflation in the European “core,” mainly Germany — which supplies an extra reason to keep interest rates low and print lots of money. But the central bank won’t move.
Meanwhile, senior officials are asserting that austerity and internal devaluation really would work if only people truly believed in their necessity.
Consider, for example, what Jörg Asmussen, the German representative on the European Central Bank’s executive board, just said in Latvia, which has become the poster child for supposedly successful austerity. (It used to be Ireland, but the Irish economy keeps refusing to recover). “The key difference between, say, Latvia and Greece,” Mr. Asmussen said, “lies in the degree of national ownership of the adjustment program — not only by national policy-makers but also by the population itself.”
Call it the Darth Vader approach to economic policy; Mr. Asmussen is in effect telling the Greeks, “I find your lack of faith disturbing.”
Oh, and that Latvian success consists of one year of pretty good growth following a Depression-level economic decline over the previous three years. True, 5.5 percent growth is a lot better than nothing. But it’s worth noting that America’s economy grew almost twice that fast — 10.9 percent! — in 1934, as it rebounded from the worst of the Great Depression. Yet the Depression was far from over.
Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.
Still, are we much better? America’s near-term outlook isn’t quite as dire as Europe’s, but the Federal Reserve’s own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won’t move.
What explains this trans-Atlantic paralysis in the face of an ongoing human and economic disaster? Politics is surely part of it — whatever they may say, Fed officials are clearly intimidated by warnings that any expansionary policy will be seen as coming to the rescue of President Obama. So, too, is a mentality that sees economic pain as somehow redeeming, a mentality that a British journalist once dubbed “sado-monetarism.”
Whatever the deep roots of this paralysis, it’s becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But don’t despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner."
He might know.
http://blogs.reuters.com/felix-salmon/2012/06/10/why-didnt-europe-bail-out-spains-banks-directly/
The FT has the best explanation of the way that Europe has this weekend agreed to bail out Spain’s banks. Impressively, the whole deal was done on Saturday, in good time to let all the Spanish negotiators spend Sunday preparing for and watching Spain’s big opening match against Italy in the European Cup. (Portugal lost today; Greece had a draw on Friday; and Ireland isn’t in the tournament plays Croatia tomorrow. According to the odds, Spain has the highest chance of winning both the PIIGS subset and the tournament as a whole.)
The big question, going into this weekend, was whether Europe would be willing to recapitalize Spain’s banks directly, or whether it would simply help Spain bail out its banks. And the answer seems to be somewhere in the middle. Europe is going to lend money to Frob, which is basically the Spanish Tarp; Frob, in turn, will use that money to recapitalize the banks.
So really there are two bailouts here. The Spanish government is getting debt finance from Europe, and the Spanish banks are getting equity finance from the Spanish government. Because the money is ultimately going to the banks, the Europeans and the Spaniards have an excuse for not imposing tough austerity conditions on Spain. And that’s good: Spain has never been fiscally profligate in the way that Greece was, and there’s no reason why it would ever benefit from some kind of Germanic nanny double-checking and second-guessing every check it writes.
On the other hand, all the money for bailing out Spain’s banks is immediately going to become Spanish sovereign debt. And that’s not good, for anyone worried about the Spanish fiscal situation. What’s more, it’s unclear how much of the money is going to come from the ESM rather than the EFSF. That might seem like a niggardly distinction, but it’s an important one: the ESM has preferred-creditor status, which means that it’s senior to anybody buying Spanish sovereign bonds. And as a result, at the margin, the more ESM debt that Spain has, the higher the spread on Spanish government bonds, since every euro of ESM debt effectively subordinates every euro owed by the Spanish government to bondholders.
The way to avoid all this would have been for Europe to recapitalize the Spanish banks directly, rather than doing so by lending money to Frob. The IMF couldn’t participate in such a plan, since it can only lend to governments, not to banks — but the IMF isn’t participating in this plan, either. And by taking equity in the Spanish banks, Europe would actually have a chance of turning a substantial profit on the whole operation, instead of just lending money to Spain at concessionary rates. As it is, if the equity that Spain takes in the Spanish banks ends up rising in value, all that rise in value will accrue to the government of Spain, rather than to the Europeans who provided the money.
But clearly Europe hasn’t yet reached the point at which it’s willing to directly help out the financial sectors of member countries, no matter how necessary or potentially profitable that might be. Taking equity stakes in Spanish banks — or any other private-sector institution, for that matter — is clearly something which Europe wants to leave to individual countries, and I can understand that, at least in theory. In practice, however, I suspect that Spain and the markets would have been much happier if the flow of money had been direct, rather than being intermediated by the Spanish government."
The big question, going into this weekend, was whether Europe would be willing to recapitalize Spain’s banks directly, or whether it would simply help Spain bail out its banks. And the answer seems to be somewhere in the middle. Europe is going to lend money to Frob, which is basically the Spanish Tarp; Frob, in turn, will use that money to recapitalize the banks.
So really there are two bailouts here. The Spanish government is getting debt finance from Europe, and the Spanish banks are getting equity finance from the Spanish government. Because the money is ultimately going to the banks, the Europeans and the Spaniards have an excuse for not imposing tough austerity conditions on Spain. And that’s good: Spain has never been fiscally profligate in the way that Greece was, and there’s no reason why it would ever benefit from some kind of Germanic nanny double-checking and second-guessing every check it writes.
On the other hand, all the money for bailing out Spain’s banks is immediately going to become Spanish sovereign debt. And that’s not good, for anyone worried about the Spanish fiscal situation. What’s more, it’s unclear how much of the money is going to come from the ESM rather than the EFSF. That might seem like a niggardly distinction, but it’s an important one: the ESM has preferred-creditor status, which means that it’s senior to anybody buying Spanish sovereign bonds. And as a result, at the margin, the more ESM debt that Spain has, the higher the spread on Spanish government bonds, since every euro of ESM debt effectively subordinates every euro owed by the Spanish government to bondholders.
The way to avoid all this would have been for Europe to recapitalize the Spanish banks directly, rather than doing so by lending money to Frob. The IMF couldn’t participate in such a plan, since it can only lend to governments, not to banks — but the IMF isn’t participating in this plan, either. And by taking equity in the Spanish banks, Europe would actually have a chance of turning a substantial profit on the whole operation, instead of just lending money to Spain at concessionary rates. As it is, if the equity that Spain takes in the Spanish banks ends up rising in value, all that rise in value will accrue to the government of Spain, rather than to the Europeans who provided the money.
But clearly Europe hasn’t yet reached the point at which it’s willing to directly help out the financial sectors of member countries, no matter how necessary or potentially profitable that might be. Taking equity stakes in Spanish banks — or any other private-sector institution, for that matter — is clearly something which Europe wants to leave to individual countries, and I can understand that, at least in theory. In practice, however, I suspect that Spain and the markets would have been much happier if the flow of money had been direct, rather than being intermediated by the Spanish government."
This set of events delays the disaster like a stay of execution.
It is not a commutation or a pardon.
"Why merging Spain's troubled banks won't fix the country's debt crisis
Ibercaja looks set to 'rescue' Liberbank and Caja3 – but Mariano Rajoy needs only to look at the UK to see why it won't work
Bankia's Madrid HQ. Bankia was the result of the merger of seven cajas. Photograph: Paul White/AP
Bank mergers solve the debt crisis. At least that is the strongly held view in Madrid, where Spanish prime minister Mariano Rajoy is considering yet another rescue, this time involving a possible merger of Ibercaja with rivals Liberbank and Caja3.
It follows a longstanding policy, established by the previous socialist administration, that smashing together almost all the troubled cajas, which operate much like building societies, into larger clusters is the way out of the crisis.
No amount of argument has dissuaded Rajoy, despite the most high profile victim of the financial crash turning out to be Bankia, which is the result of a seven cajas coming together.
A bigger banking group means a bigger balance sheet to bear the heavy load of debt – that's the thinking. But a bigger balance sheet is matched by bigger debts. So in Bankia's case, instead of some heavily indebted cajas and other well financed groups, Spain finds itself with one unstable institution housed in the bank's Madrid HQ.
Government officials need only to look to the UK to observe the folly of merging distressed banks into larger groups.
Gordon Brown's approval of the merger of Halifax and Lloyds TSB wrecked what remained of Lloyds' balance sheet. The regulator, the FSA, waved through Royal Bank of Scotland's merger with ABN Amro on the basis that bigger is best in a financial crisis, not looking to see whether ABN was a repository for toxic debt itself, which it was.
Brown also gave the nod to Nationwide as it swallowed some of its bust rivals, a decision that pushed the UK's largest building society into deep financial trouble.
Instead of using better-off financial groups as rescue vehicles, the government should have nationalised all the weaklings. Such a policy rewards the conservatism and prudence of the better financed groups and punishes those that have lent too much. It also maintains the plurality of the banking system. Instead we have mergers that store up problems for the future.
If it carries on Spain will soon have the same banking oligopoly that the UK suffers from and will need to think about breaking up the groups it has painstakingly put together or, as the UK is attempting, encourage new entrants.
Rajoy appears to have set his course, despite being under pressure from the ratings agencies, which dislike mergers of good banks with bad ones.
The boards of Ibercaja, Liberbank and Caja3 could agree as early as Tuesday to go ahead with a tie-up that creates a lender with €120bn of assets. In theory, Ibercaja would be rescuing Liberbank and Caja3, both of which were formed from at least three cajas.
But in reality, Rajoy is just sanctioning another Bankia – and look at where that has got him."
It follows a longstanding policy, established by the previous socialist administration, that smashing together almost all the troubled cajas, which operate much like building societies, into larger clusters is the way out of the crisis.
No amount of argument has dissuaded Rajoy, despite the most high profile victim of the financial crash turning out to be Bankia, which is the result of a seven cajas coming together.
A bigger banking group means a bigger balance sheet to bear the heavy load of debt – that's the thinking. But a bigger balance sheet is matched by bigger debts. So in Bankia's case, instead of some heavily indebted cajas and other well financed groups, Spain finds itself with one unstable institution housed in the bank's Madrid HQ.
Government officials need only to look to the UK to observe the folly of merging distressed banks into larger groups.
Gordon Brown's approval of the merger of Halifax and Lloyds TSB wrecked what remained of Lloyds' balance sheet. The regulator, the FSA, waved through Royal Bank of Scotland's merger with ABN Amro on the basis that bigger is best in a financial crisis, not looking to see whether ABN was a repository for toxic debt itself, which it was.
Brown also gave the nod to Nationwide as it swallowed some of its bust rivals, a decision that pushed the UK's largest building society into deep financial trouble.
Instead of using better-off financial groups as rescue vehicles, the government should have nationalised all the weaklings. Such a policy rewards the conservatism and prudence of the better financed groups and punishes those that have lent too much. It also maintains the plurality of the banking system. Instead we have mergers that store up problems for the future.
If it carries on Spain will soon have the same banking oligopoly that the UK suffers from and will need to think about breaking up the groups it has painstakingly put together or, as the UK is attempting, encourage new entrants.
Rajoy appears to have set his course, despite being under pressure from the ratings agencies, which dislike mergers of good banks with bad ones.
The boards of Ibercaja, Liberbank and Caja3 could agree as early as Tuesday to go ahead with a tie-up that creates a lender with €120bn of assets. In theory, Ibercaja would be rescuing Liberbank and Caja3, both of which were formed from at least three cajas.
But in reality, Rajoy is just sanctioning another Bankia – and look at where that has got him."
http://ftalphaville.ft.com/
[Spanish bank bailout] No bail-in, Spain?
Why shouldn’t equity and (at least in the short term) Spanish bonds rally?
It’s a bank recap which was long overdue, and under the cover of which (at least some) losses will be recognised and absorbed. Meanwhile creditors of Spanish banks seem to escape taking losses in the restructuring of the system.
All that, and there’s been a great deal of spin already about a perceived lack of bailout conditions on the sovereign. There are no specific demands for fiscal change in the Eurogroup statement welcoming Spain’s intention to ask for loans. Nor will the IMF — “It’s Mostly Fiscal” — lend under a programme with conditions. The spin goes right to the top. “There’s no conditionality of any kind. This does not affect the deficit,” according to Spain’s prime minister.
Well, two things.
First, structural reform. Go back to the Eurogroup statement:
The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The Eurogroup is confident that Spain will honour its commitments under the excessive deficit procedure and with regard to structural reforms, with a view to correcting macroeconomic imbalances in the framework of the European semester. Progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance.You can start to see why fiscal demands weren’t made. Spain is already reporting to the European Commission under the Excessive Deficit Procedure, which was ‘reinforced’ in last year’s Fiscal Compact.
If you already thought the Compact and things like the Six Pack reforms were witless unworkable austerity — the Spanish bank bailout still features witless and unworkable austerity. There just isn’t the intensive internal devaluation you might see in Portugal, Ireland or Greece with quarterly inspections from the Troika. If you thought that Spain was already doing OK at improving export competitiveness on its own before the bailout, it will still be doing this on its own after the bailout.
As a last point on this, Ireland could maybe feel a bit miffed about Spain avoiding fiscal conditions (anyone remember Sarko’s campaign to raise the Irish corporation tax rate around the Irish bailout negotiations?). At the same time we’d recognise Karl Whelan’s argument that Spain’s deficit in 2012 is smaller than Ireland’s was in 2010. Though you could then argue about how much of the Irish deficit already reflected banking rescues.
Second, banking reform.
When Spanish politicians talk about ‘no conditions’, it seems to us that they really mean no oversight — i.e. no humiliating audiences in Madrid with the proconsuls of the Troika.
We doubt that’s how it’s going to work, especially because the obvious conditions on the bank recap are clearly going to dig deep into Spanish society if they’re applied. The whole reason we’ve got to this point is because of three years of consistent, bipartisan impotence and a culture of denial on the part of Spanish governments towards the cajas. The cajas are intensely political creatures. IMF/ EU oversight of these lenders, including the “horizontal structural reforms of the domestic financial sector” mentioned by the Eurogroup, means that a pretty big patronage system is about to be confronted by outsiders. How many of the cajas are non-viable? Should regional government ties to cajas be monitored?
Our last point though is about how far the ‘recapitalisation tools’ might go.
We don’t know how much of the €100bn is going to be needed, pending the current independent audit of bank loan books. But we’ve established that contrary to the spin pumped out by the Spanish government, it will continue guaranteeing this bailout of banks. Currently that means the recapitalisation bill includes making all Spanish bank creditors whole, whether senior or subordinated.
But there’s an interesting section in the EFSF’s guidelines on its bank recap loans (the types of loan Spain would get if it does access the EFSF before the ESM):
Where appropriate, additional conditionality could draw from the future EU bank crisis resolution framework, which will be proposed by the Commission after summer. In particular, such a conditionality could include requirements to enhance the supervisory toolbox in the three crucial phases of crisis management identified (preparation, early intervention and resolution) such as recovery and resolution plans, early intervention tools for supervisory authorities, asset separation tools, bail-in tools.This framework was unveiled last week, including bail-in tools for “as wide a range of the unsecured liabilities of a failing institution as possible”. It’s not supposed to come online until 2018 though here the EFSF says it “could draw from” the measures. If Spain ends up borrowing solely from the ESM, we’d assume that the ESM guidelines on bank recap loans won’t depart too far from the EFSF.
We doubt they’d have the guts to do it. But as we said, in a ‘no conditions’ bailout — interesting stuff.
My guess is there is no existing deposit security in Spain.
I am reading of the intention to promise.
There are negotiations on going.
There is no contract and no delivered funds.
Run.
The run will not be good for Spain. It is the only option for depositors.
.
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