The Banks in Spain Swirl Mainly Down the Drain
Spain’s banks, especially the cajas, are in desperate trouble due to that country’s real estate boom and bust. The banks hold large quantities of mortgages and loans to developers that are seriously underwater, a fact that the banks have been very slow in recognizing-as is almost always the case. Don’t recognize the losses, you can perhaps benefit from a miracle turnaround in the market in the future. Recognize them, you are out of business immediately.
Spain’s government has responded by forcing the banks to write down their mortgage assets, and to raise more capital. The problem is that capital is a buffer against possible future losses; you can’t get anyone to contribute capital to pay for losses already realized. So where is the money going to come from? Because private capital is not going to fund past losses, the only real candidate is the Spanish government, but it has agreed to stump up only 15 billion Euros, far short of the 50 billion Euros that market participants deem necessary. But Spain, with nearly 25 percent unemployment rate and an ongoing recession (with a forest decline in its economy of 1.8 percent this year) is unable to fund the amount necessary to bailout the banks. Its bond yields already top 6 percent.
Which means that the money has to come from outside . . . the ECB or the European Stability Mechanism. But the Germans have already made it clear they are not going to permit the use of ESM funds. Much more ECB support is also unlikely.
So how is this going to work, exactly?
Spain is also ordering the banks to dump their bad real estate loans into asset management companies (an expedient that the Chinese have used on multiple occasions). But that can lead to fire sales (if the asset management companies dump the assets) which exacerbates the underlying problems. And this just moves the losses around. It doesn’t eliminate them.
So Spain is in deep trouble, and there is no obvious way out.
All this is happening, moreover, at a time when Greece is spinning out of control again, and quite predictably. There was no way to commit the Greek electorate to adhering to any deal negotiated with Europe. And they are quite clearly rebelling at the idea, confronting Europe with the choice between a Greek exit from the Euro and shoveling more money down the rat hole. There are already reports that the Troika is willing to make concessions on the recently negotiated bailout deal, concessions that will almost certainly have to be followed by more concessions, and yet more.
This all resembles a disaster like Chernobyl,or a plane crash, where there are cascading failures. Perhaps one of them would be containable, but multiple failures-especially those that feed back on one another-are far, far more difficult to manage. I keep looking for a way out. Not seeing it.
The Germans/EU/ECB will keep shovelling money down the various rat holes one euro at a time, and within five to ten years we’ll be done. Every shovelled euro is only going to come a few days before it’s necessary and no earlier as this minimises the adverse selection problem and allows the creditors max leeway to steer the process. There is no quick way out, but it’s not a crisis that needs a quick way out. Impatient markets will get used to that, internalise the consequences, and move on. Chernobyl is an apt analogy: at some point you ran out of things which could fail further and had poured enough concrete on the thing.
Comment by cig — May 12, 2012 @ 4:50 pm
@ciq – I hope you are right, but there may not be time. This is not just a technocratic issue but one that is causing the political establishments to lose legitimacy: in other words, it is not just that Fascists of the left and right in Greece will make a mockery of the “deal” that was cut, but that the whole process of “supra national” politics in the EU itself is coming apart. What happens to all the other deals that have been cut if the Greeks bolt? If these fold, then what? I.e., this is not just an economic problem, but a political one – a non elected and unresponsive supra government failing, with half built institutions losing their legitimacy, and no clear replacement in sight.
In part what we have seen over the last 10-15 years has been a kind of Bureaucratic coup d’etat: with the “European” authorities particularly the monetary ones, seizing control and driving the politicians (it was estimated that 60-70% of the British Parliament’s actions were to codify decisions made in Brussels). This has been very convenient for the politicians – it is always nice to have power, perks, and little responsibility! What does and MEP actually do? Europe as a concept (and source of money) has been a very convenient tool for the political class.
While the non elected monetary authorities have taken center stage in this latest part of the crisis (see the Euro swaps and LTRO actions), the political fallout from the financial crisis is just beginning and looks like it will put paid to the original “European” (unelected indirect control) model. Furthermore it has weakened or is weakening the National political establishments that supported it(see Greece and the rise of the marginal parties in many countries). This is now a political crisis, more, a crisis of legitimacy and if you think markets are impatient wait till you meet the enraged voters.
As regards to running out of things that can be broken a la Chernobyl, we haven’t even started to list them. Irredentism and Revanchism in the Balkans comes to mind, as does anti North African immigrant/gypsy racism, exacerbated regionalism in Italy (Lombard League) and Spain (Catalan separatism), the Turkish Issue re Islamic governments, revised and rising dictatorships in the former Soviet States etc. etc. etc. Remember, this is the continent that gave us two world wars, and the cold war, all of which were won (or temporarily resolved) only when the US got in. Never underestimate the power of the irrational in politics, hatred is a tool that is easily used, and a lot of people more than happy to cause trouble (Putin, anyone?).
Again, I hope you are right, but the blood-soaked stain that is European History argues against it.
Comment by sotos — May 12, 2012 @ 8:05 pm
Ironically, Chernobyl (and Fukushima for that matter) was one of those accidents, where doing nothing was the best course of action.
Comment by So? — May 12, 2012 @ 9:39 pm
Emergence + evolution in pre-revolutionary societies. We’re a heartbeat away from chaotic. The only thing to do is to bound the emergence, and contain it — let it take its course without spilling out of the containment.
Comment by markets.aurelius — May 13, 2012 @ 9:03 am
[…] channels by which the Greek tragedy could flow beyond Greece are now bubbling above the surface. A deepening banking crisis in Spain is one. If Europe’s savers come to believe that a euro in an account on one side of a border […]
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[…] channels by which the Greek tragedy could flow beyond Greece are now bubbling above the surface. A deepening banking crisis in Spain is one. If Europe’s savers come to believe that a euro in an account on one side of a border […]
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[…] which the Greek tragedy could stream over and above Greece are now effervescent over the floor. A deepening banking disaster in Spain is one particular. If Europe’s savers occur to think that a euro in an account on one […]
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[…] channels by which the Greek tragedy could flow beyond Greece are now bubbling above the surface. A deepening banking crisis in Spain is one. If Europe’s savers come to believe that a euro in an account on one side of a border […]
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[…] channels by which the Greek tragedy could flow beyond Greece are now bubbling above the surface. A deepening banking crisis in Spain is one. If Europe’s savers come to believe that a euro in an account on one side of a border […]
Pingback by Eurozone: the austerity allergy | Editorial | ccnew — May 14, 2012 @ 8:03 am
The way out is collapse and the sooner the better… There is a young generation of greeks and spainards with no hope for building a business or family- Let the old incumbent farts suffer the pain of collapse, and a wipeout of their earnings. It will happen either way- but the longer the old guard holds on the more they pass the pain to the younger generation who had no part in creating the unproductive society.
Comment by scott — May 14, 2012 @ 12:25 pm
[…] channels by which the Greek tragedy could flow beyond Greece are now bubbling above the surface. A deepening banking crisis in Spain is one. If Europe’s savers come to believe that a euro in an account on one side of a border […]
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[…] channels by which the Greek tragedy could flow beyond Greece are now bubbling above the surface. A deepening banking crisis in Spain is one. If Europe’s savers come to believe that a euro in an account on one side of a border […]
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