The Bailout of Spain

by MIKE WHITNEY

“The burden of recapitalizing insolvent banks or loss-making acquisitions of solvent banks will fall on Spanish citizens.”

— Karl Whelan, economist at University College, Dublin.

Before EU finance ministers approve the 100 billion euro bailout for Spain, they might want to ask themselves one question: Will it really help?

Sure, it’ll keep the markets bubbly until mid-week when fears of the Greek elections set in, (June 17) but that’s about it. It won’t fix the eurozone’s underlying problems, in fact, it doesn’t even address them. The narrow purpose of the bailout is to keep insolvent banks propped up to avoid another Lehman Brothers-type catastrophe. That’s it. In other words, the 100 billion will not boost competitiveness, spur growth, reduce unemployment, or increase fiscal and political integration. It doesn’t do any of these things, in fact, Spain’s debt-to-GDP ratio will widen even more due to the new burden its leaders have taken on. That means, Spain’s working people will have to endure even harsher conditions for a longer period of time to repay the obligations assumed by Madrid. How does that help?

The Eurogroup has agreed to lend Spain 100 billion, but they have no way of knowing how much more the country will need in the future. Just take a look at this and you’ll see what I mean:

“Spain’s banks have over €300 billion in exposure to the real-estate sector, mostly through loans to developers. Around €180 billion of this exposure is considered “problematic” by Spain’s central bank.

Estimates suggest that there are about 700,000 vacant newly built homes, but including repossessed properties the total could be as high as one million or even higher. At current sales levels, it will take many years to clear the backlog, which will be compounded by more properties being completed and coming onto the market. Housing prices have fallen by 15-20% but are forecast to fall eventually by as much as 50-60%. A severe recession and unemployment of 25% means that losses on Spain’s over €600 billion of home mortgages loans are likely to also rise.” (“The Spanish “Bailout”, Whoops – “Assistance”!, Satyajit Das, Naked Capitalism)

Housing prices have a long way to fall which means the slump is going to drag on indefinitely putting more pressure on bank balance sheets. Expect more bailouts to come. The 100 billion is just the tip of the iceberg.

And, keep in mind,  the bailout will not ease credit conditions either. The money will be used to roll over debt, and to restructure and recapitalize underwater banks. The truth is, that none of the bailouts have eased credit conditions. Even after the ECB launched its trillion euro Long-Term Refinancing Operation (LTRO)–which provided 3-year, low interest loans to financial institutions– lending is still in the doldrums with no sign of improvement. So, don’t expect the bailout lead to another expansion.

The same rule applies to borrowing costs. The bailout  doesn’t ensure that yields on Spain’s debt will fall or that the ratings agencies won’t continue to downgrade its banks and sovereign bonds. (which will make borrowing more expensive) In fact, adding 100 billion to the country’s debt load will probably trigger more downgrades, lowering Spanish debt to junk status.

Finally, the bailout will not stop the slow-motion bank run that’s seen 100 billion euros exit Spain in the last year. (How’s that for symmetry?) The country is borrowing the exact same amount that it’s lost due to the flawed architecture of the eurozone which does not provide blanket guarantees on deposits.

Here’s an excerpt from the Eurogroup’s statement on Spain:

“The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect….

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total….

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.”

So, Prime Minister Mariano “We don’t need help” Rajoy will have accept an IMF monitoring team that will sift through the books of distressed Spanish banks and expose the boundless red ink and corruption that lies therein. The involvement of the IMF means that a lot of shareholders are going to be wiped out while bondholders take severe haircuts.

Spain will now join the other bailout-dependent countries, Greece, Portugal and Ireland, although it will not be asked to increase austerity measures which Rajoy has already implemented with gusto. With the economy already in deep recession and unemployment tipping 25 percent, EZ finance ministers believe that more belt tightening would be counterproductive. Accordingly, the European Commission has agreed that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of GDP. Here’s how Greek economist Yanis Varoufakis summed up recent developments in Spain:

“Spain’s current predicament is instructive: To get money to give to its decrepit banks, the nation must be humiliated and undergo further fiscal waterboarding so that Italy and others are deterred from turning to the EFSF (European Financial Stability Facility) for help. In this sense, when Europe’s functionaries say that there is no need for further action on Spain since the EFSF is available to help, they are inviting the Spanish to enter the Workhouse for a life of undeserved misery on behalf of their bankers. And they have the audacity to call this ‘solidarity’ with the Spanish people.” (“Solidarity Euro-Style: Finnish loans, ECB bond purchases, EFSF tough love and assorted horror stories from the postmodern Euro-Workhouse”, Yanis Varoufakis)

The Spanish bank bailout is only going to make matters worse for working people who’ll see the losses of corrupt financial institutions heaped onto their shoulders via higher taxes, cuts to social programs, and a firesale of publicly owned assets. They’ll pay the price while the crooks walk away scot-free.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

Like What You’ve Read? Support CounterPunch
Weekend Edition
August 28-30, 2015
Andrew Levine
Viva Trump?
Jeffrey St. Clair
Long Time Coming, Long Time Gone
Mike Whitney
Looting Made Easy: the $2 Trillion Buyback Binge
Alan Nasser
The Myth of the Middle Class: Have Most Americans Always Been Poor?
Rob Urie
Wall Street and the Cycle of Crises
Randy Blazak
Donald Trump is the New Face of White Supremacy
Ismael Hossein-Zadeh
Behind the Congressional Disagreements Over the Iran Nuclear Deal
Lawrence Ware – Marcus T. McCullough
I Won’t Say Amen: Three Black Christian Clichés That Must Go
Evan Jones
Zionism in Britain: a Neglected Chronicle
John Wight
Learning About the Migration Crisis From Ancient Rome
Andre Vltchek
Lebanon – What if it Fell?
Robert Fantina
Hillary Clinton, Palestine and the Long View
Ben Burgis
Gore Vidal Was Right: What Best of Enemies Leaves Out
Suzanne Gordon
How Vets May Suffer From McCain’s Latest Captivity
Robert Sandels - Nelson P. Valdés
The Cuban Adjustment Act: the Other Immigration Mess
Uri Avnery
The Molten Three: Israel’s Aborted Strike on Iran
John Stanton
Israel’s JINSA Earns Return on Investment: 190 Americans Admirals and Generals Oppose Iran Deal
Bill Yousman
The Fire This Time: Ta-Nehisi Coates’s “Between the World and Me”
Michael Welton
The Conversable World: Finding a Compass in Post-9/11 Times
Brian Cloughley
Don’t be Black in America
Charles Pierson
How the US and the WTO Crushed India’s Subsidies for Solar Energy
Kent Paterson
In Search of the Great New Mexico Chile Pepper in a Post-NAFTA Era
Binoy Kampmark
Live Death on Air: The Killings at WDBJ
Gui Rochat
The Guise of American Democracy
Emma Scully
Vultures Over Puerto Rico: the Financial Implications of Dependency
Chuck Churchill
Is “White Skin Privilege” the Key to Understanding Racism?
Kathleen Wallace
The Id(iots) Emerge
Andrew Stewart
Zionist Hip-Hop: a Critical Look at Matisyahu
Gregg Shotwell
The Fate of the UAW: Study, Aim, Fire
Halyna Mokrushyna
Decentralization Reform in Ukraine
Scott Parkin
Katrina Plus Ten: Climate Justice in Action
Norman Pollack
World Capitalism, a Basket Case: A Layman’s View
Sarah Lazare
Listening to Iraq
John Laforge
NSP/Xcel Energy Falsified Welding Test Documents on Rad Waste Casks
Wendell G Bradley
Drilling for Wattenberg Oil is Not Profitable
Joy First
Wisconsin Walk for Peace and Justice: Nine Arrested at Volk Field
Mel Gurtov
China’s Insecurity
Mateo Pimentel
An Operator’s Guide to Trump’s Racism
Yves Engler
Harper Conservatives and Abuse of Power
Michael Dickinson
Police Guns of Brixton: Another Unarmed Black Shot by London Cops
Ron Jacobs
Daydream Sunset: a Playlist
Charles R. Larson
The Beginning of the Poppy Wars: Amitav Ghosh’s “Flood of Fire”
David Yearsley
A Rising Star Over a Dark Forest
August 27, 2015
Sam Husseini
Foreign Policy, Sanders-Style: Backing Saudi Intervention
Brad Evans – Henry A. Giroux
Self-Plagiarism and the Politics of Character Assassination: the Case of Zygmunt Bauman