It’s already a an open secret that the Spanish banking sector must be bailed out with European funds. Although this is still officially denied, senior European leaders have begun to make statements to the media, playing down the stigma attached to the fact that Spanish banks must be bailed out in the same way as Greece, Ireland or Portugal. The funds will come from the infamous European Financial Stabilisation Facility (EFSF) and the European Stability Mechanism (ESM). And it seems that the Spanish banking sector can no longer conceal its insolvency.
The Deposit Guarantee Fund (FGD) no longer exists, as it has had to be drawn upon for the recent restructuring and takeovers of savings banks by other institutions whose insolvency is less apparent. But this is not information that anyone would wish to publicise in a system based on trust, in the fiat money as a bargaining chip.
Spanish banks can no longer withstand or cover up further falls in property prices that are overwhelming their balance sheets, nor can they cope with rising levels of non-performing loans. The injection of profits derived from borrowing money almost for free from the open market (LTRO) from the ECB and channelling them into government debt is no longer sufficient to offset the losses incurred by Spanish banks as a result of falling property valuations. This is because, unlike what happened in the US property market – where prices (and banks) suffered a dramatic but realistic correction – in Spain there have been attempts to contain, gloss over and conceal these falls. The country’s banks bought up the valuation firms so that they would value properties in a way that suited the level of depreciation their balance sheets could withstand. Furthermore, the banks have systematically refused to sell their properties at market prices, which would have forced them to record them at their true value, thereby causing their balance sheets to collapse. Financial institutions in this country have preferred not to sell the properties rather than admit their insolvency. But of course, there comes a point when the capacity to absorb properties and distort the reality of market valuations reaches its limit. And as you can see from the graph below, the behaviour of the Spanish property bubble has, to date, been straight out of the textbook. It’s dizzying to see what’s coming. Now you understand why the EU is starting to talk about bailing out the Spanish banks, don’t you?
For this reason – because the Spanish property market is continuing to fall sharply and will continue to do so for many years to come – the EU is being forced to bail out the Spanish banking sector. This process of reforming the financial system, which is currently underway (and which the previous government did not dare to undertake), is already encouraging banks to agree to sell their properties and to account for them at prices closer to market value. And this new scenario, which will be exacerbated by the use of European bailout funds, will in turn lead to a very significant increase in the supply of property in Spain, causing prices to fall even further. The effects are already beginning to show in the National Statistics Institute’s (INE) figures on falls in property prices in Spain in 2011, which stood at -11.21 per cent year-on-year. We will see what figure is reached in 2012, with banks offloading properties on a massive scale for the first time since the start of this crisis.
We must not forget that this process is traumatic but healthy. And that it should have taken place much earlier, as happened in the US market. But to achieve this, unfortunately, it is essential to force the banks to face up to their grim reality and to make immediate use of European bailout funds. Without these bailout injections, the Spanish financial system is heading straight for bankruptcy. By clearing the properties that are clogging up the banks’ balance sheets, prices will fall even more sharply, but this will mark the start of a purge that will allow us to hit rock bottom once and for all. And the Spanish banking system, bailed out by the wealthier parts of Europe, will cease to be a fatal threat to the future of the EU. Then it will be time to turn our attention to the solvency of the central government and the autonomous communities.
If the restructuring of our banking system and the downturn in the property sector instil sufficient confidence in the market, we might even survive without any further bailouts other than those used to rescue the banks. But if we fail to secure sufficient confidence from creditors, the state’s survival will also depend on Europe’s wealthy (via the ECB, of course) bailing us out once again. That is the consequence of having far more debt than we are able to repay. Either we default – whether or not this is disguised by euphemisms such as ‘voluntary debt restructuring’ – or Europe as a whole becomes proportionally poorer because of us, by printing money, devaluing the euro and bailing out our mess. Mercozy decides.
Meanwhile, most of the investment products guaranteed by Spanish banks are nothing short of Russian roulette. These are packages that banks and savings banks sell to uninformed savers, packed full of debt that nobody wants anymore. But hidden away in little packages with pretty gift-wrap and red bank bows, they unscrupulously invest people’s life savings. For beneath the sheep’s clothing of «guaranteed» products lurk wolves in the form of Spanish government debt, regional government debt, bank and savings bank debt, mortgage-backed securities, and debt from the ICO, debt of the FROB, debt of the FADE, etc., etc. In short, they are all completely insolvent assets. They are prime candidates for default or, at best, a bailout – including, of course, the guarantees provided by the financial institutions that issue these products.
Trusting what the banks sell you has always been very reckless, but these days it’s downright mad.