Guest Post: Spain's Banking Reform Is A Bailout Of The Status Quo

Tyler Durden's picture

Submitted by J. Luis Martin of the Truman Factor (via El Confidencial),

If a couple of months ago we warned about the eerie similarities between Mexico’s 1994 financial fiasco and what is now taking place in Spain, the latest details on the Spanish financial sector bailout continue to remind us not to underestimate politicians’ readiness to undermine whatever is left of a free market capitalist system.

A bad “bad-bank”

According to El Confidencial, and as per the latest draft of the European Commission MoU, the plan to cleanse the Spanish banking sector of its toxic assets by means of transferring them into “bad banks” has a new twist: instead of reflecting such assets’ real market value, the idea is to impose a markup (based on an estimated “long-term value”) to minimize losses. In essence, the Spanish government aims to fix real estate prices for over the next 10 years.

The problem is that Spain’s hugely inflated real estate sector will not see any type of recovery until property values truly reach bottom – and even plunge under replacement costs in some areas. This, unless, the government also plans to force investors to buy overpriced assets by law. One never knows.

The “bail-in” alternative

Economist and Director of Spain’s Juan de Mariana Institute, Juan Ramón Rallo, has suggested a “bail-in” formula to effectively restructure and recapitalize the financial sector in a more transparent and fair manner: to convert the banks’ subordinated debt, as well as some of their senior unsecured debt into equity.

Rallo’s formula does not come free of pain, however, as it would severely hit shareholders, creditors, and small investors such as depositors who bought into obscure securities. However, this is how failure should take place in a free market system. This is also how most businesses deal with failure and learn from mistakes.

Certainly, the resulting bank owners under Rallo’s proposed “bail-in” would learn the lesson of the dangers involved in placing politicians and ballet dancers on banks’ boards.

Bailing out the status quo

In contrast to Rallo’s “bail-in” proposal, the current Spanish banking sector reform is aimed at bailing out and protecting those who have benefited from the practices which caused the problem in the first place: the political class, inefficient regulators, as well as private companies close to the establishment. More significantly, under the current plan the obscene abuse to which the once respected savings banks were subjected will not be exposed. This is particularly convenient with regards to the embarrassing mess taking place in the region of Valencia; one of Spain’s most notorious examples of reckless spending at the hands of politicians, and where Rajoy’s Popular party (PP) has been in power for almost 20 years.

Furthermore, the Spanish financial system reform inches closer to protecting the status-quo at the tax-payers’ expense, as it is evident that the €100bn “credit line” Europe has granted the country to do so is everything but “unconditional.”

Ultimately, the Spanish bailout of the financial sector postpones the problem a few years into the future: a distant place where those responsible for today’s financial debacle will be further sheltered, and where the then political leader in office may, like Rajoy, conveniently put the blame on his predecessors’ “legacy.”

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Snakeeyes's picture

True, it is a stalling tactic. But it won't work!!!!!

Spain's data is bad and the US will be tempted to do MORE monetary stimulus.

But with M2 Money Velocity at Eisenhower levels, nothing will work.

LowProfile's picture

Not until the ECB devalues.

And maybe not until the yen devalues, either.

wandstrasse's picture

but but but ... the bailout is - gasp - NOT to help the economy and the people???

Blond Viking's picture

Newspapers and sites like ZH give us the big picture. But sometimes a snapshot (like the photo from the Greek central bank) can say much more than so many analyses. The text below is one of those snapshots. Originally published as a reader comment on Swedish financial daily, I thought it was so good I saved it and translated it into English for wider distribution, making this my first comment on ZH. This is what a Scandinavian living on the Costa del Sol has to say:


“The banks are on the verge of bankruptcy. They don’t have any money left. They have tens of thousands of flats and construction projects estimated at fantasy amounts on their balance sheets.


A lot of the objects are impossible to sell and have a negative value since demolition is the only option. The rest may have a maximum market value of 20% of the book value.


The banks cannot sell since this would force them to lower their prices and the whole house of cards comes tumbling down.


I have a flat on the Costa del Sol, in a complex where the banks own roughly 80%. Those who bought their flats desperately want to sell, since the whole area is decaying. The banks do not pay the maintenance fees, and have not done so since 2008, in the hope of shifting these accumulated costs onto future buyers. Private buyers who once paid cash and are trying to sell have lowered their prices to EUR 30-50,000, but nothing much is happening. The banks have their flats for sale for the same price as in 2007, app. EUR 200,000, otherwise their balance sheets will crash. Those who bought with mortgages have long since stopped paying the banks and have abandoned their flats. Many of those who have left did not even empty their pantries and fridges, so the places are full of vermin and cockroaches.


During the golden years a lot of people from South America came to Spain, got jobs, bought houses and flats with mortgages of 110%, no problem. They were the first to abandon their houses and flats and left Spain. Subsequently many other foreigners and Spaniards have abandoned their overleveraged houses and properties.


Up until 2007, thousands of very poor quality houses and flats were built along the coasts. The aim was to build as much as possible in as short a time as possible, sell fast and make a pile of cash. Now, after a couple of years, it turns out that some of these buildings were constructed on foundations that shift and/or move, so the houses are falling apart all on their own. I have seen examples of people who have paid their life savings for their dream house and after a couple of years they are banned by the authorities from going anywhere near them. It is too dangerous since they have ten-inch cracks and are falling apart.


The banks have also lent money to thousands of houses that were constructed without building permits, where local authorities demand demolition. These negative value properties also have fantasy valuations in the banks’ books.


The banks have lent money to practically anything, with incompetent bank employees granting loans of 150% of a fictitious, out-of-proportion value (since all prices would continue to rise in all eternity and the envelope with the 5% kickback does wonders). Building permits and things like that could just be ignored. Faked building permits could always be bought from local civil servants, if necessary.


The Spanish real estate market is an utter morass, a complete disaster that few people realise the full scope of. Reality is scary, with banks and a building trade that have acted in hair-raising ways. The real deficits in the banks are gigantic, of Biblical proportions!


And the banks have desperately hoped that the market would turn around and a miracle would happen. But miracles don’t happen often and now reality has caught up.


So the Spanish state, which is bankrupt, is going to refinance a bankrupt banking system with money from northern Europe’s tax payers via the ECB?


Somebody has to put a stop to this!”



RiverRoad's picture

We now know that the world economy was a farce when all this debt was created, so why should something that was a farce be made whole?  Let the bankers suck it up.  Better yet, as Marie Antoinette might have said, "Let them eat daffodils."

JohnKozac's picture

Good article viking. I see the same decay in many areas of the usa where zero-down mortgages combined with crappily built boxes (thrown up with sticks and cardboard in less then 2 months!) are going to make this a generation-long housing bust.

House owners are continuing to refuse to pay their mortgages but also I see many are now not paying their property taxes and homeowners insurance. It's gonna get lots worse before it gets better, as Shiller has stated many times.


Taku's picture

"smart" should've had strikethrough

TrustWho's picture

no hay problema, sólo tenemos que abordar nuestro problema de liquidez

Grand Supercycle's picture

As mentioned before, market intervention has only postponed the inevitable.

Despite short and medium term market vacillation - the following remains a constant :

>> USDX monthly indicators [ie big picture] continue to warn of significant long term USD upside. (thus EURUSD & AUDUSD etc bearish)

>> SPX monthly indicators [ie big picture] continue to warn of significant long term downside for equities which will be worse than 2008.

LowProfile's picture

Weren't you saying the SPX was going to rally?

Like, a week or two ago?


DoChenRollingBearing's picture

Greece!  Spain!  Who's next?

Italy goes down, France goes down then Germany goes down.

When what is about to happen to Greece actually DOES happen to France, you will have 48 hours, or less, to make your final preparations.  Get a good start and prepare now!

Vuke's picture

For goodness sake, can someone make Europe go away?  Reading this stuff is like watching flies trying to walk over fly paper.

Atomizer's picture

It's a good thing that the EFSF/ESM gave themself enough time to craft up another drama story. Tricking the peasants into stealing more money to support an already insolvent government payroll is indeed a difficult task.




RobotTrader's picture

Huge surge in USDX in Europe as currencies are opening as we speak.

Caviar Emptor's picture

If 2011 was the year of occupy, 2012 will be remembered as the year of apathy while the crumbling progresses to further stages of decay

RiverRoad's picture

Maybe it's all that botox making it's way into people's brains.

Racer's picture

Let me guess... long term value will always be up... even though in real terms it will really be down if you adjust for the high inflation they will create to get that 'value'

dcb's picture

as long as it allows the current folk in there to continue to pluder it will alwasy happen this way. it's goodto kick the can if you are the theif, not good if you are the honest person.

Not Too Important's picture

Maybe it's a bailout of the Angolan Royal Family/Dictator/President-For-Life:

And who's behind the Spanish flavor of the financial crisis:

Sangria, anyone?

JohnKozac's picture

More 7 course dinners, champagne and bailouts....oh yeah, another record year of Bank Bonuses set to kick in.

Clashfan's picture

All of these songs are appropriate here, now, but especially "Spanish Bombs." What a tune.