Europe believes in itself once more
The aid package to Spain is a commitment to the single currency and to the Union
On Saturday the Spanish government requested EU support for the recapitalization of its banking system, and this support was promptly forthcoming. Spain thus obtains the resources it needs to stabilize its financial system; while the EU rescues itself with this manifest support for the euro. Without Saturday’s courageous decision, not only would have the Spanish banks, and Spain itself, faced probable bankruptcy, but the single currency would have been doomed to breakdown and disappearance. This tragedy, for the moment, has been avoided.
The chosen mechanism is the European Financial Stability Facility (EFSF), which has advanced a sum of up to 100 billion euros. It will be the Spanish banking fund FROB that receives and distributes the EU funds, in the form of a loan. The real diminution of the threats hanging over the Spanish economy and the sustainability of its public debt will depend on the soundness of decisions made concerning this sum, its use, and of course its bank-by-bank allocation. On Saturday Prime Minister Rajoy missed a fine opportunity to explain all these things, and to show his face to the public on a historic, if painful occasion.
This Eurogroup decision follows upon an IMF report titled Financial Stability Assessment, which leaves no doubt about the banking system’s recapitalization needs, especially in the light of the ongoing deterioration of economic conditions. No banking system, however acceptable its initial solvency, can stand five years of economic and financial crisis. And the Spanish banks went into the crisis loaded with real estate assets, particularly vulnerable to economic downturn. The IMF, which will play an important oversight role, rightly criticizes the Spanish authorities’ excessively gradualist approach to making bank restructuring decisions. The recapitalization needs that the IMF initially estimated at around 40 billion euros did not take into account the effects derived from continuing recession and global economic deceleration.
Necessary exterior support
Exterior support was necessary to neutralize the spread of the tumor rooted in certain banks. The volume of real estate assets in the balances of Spanish banks, especially in the form of credits granted to real estate promoters, has been the main factor in the erosion of their solvency, aggravated by the downturn. The tardy response of the authorities, in tune with their underestimation of the threat, did not help them adapt to what has proved to be the severest crisis in their history.
An insistence on objectives beyond the strict restructuring of the Spanish regional savings banks, such as the obsession with turning them into commercial banks and bringing them into the stock market at the worst possible moment, did not facilitate their direct restructuring and the neutralization of the threat. Bankia was a representative case of this confusion of priorities: an amalgamated merger of several unrestructured savings banks, brought to the stock market in precarious conditions, leading to a traumatic nationalization.
The large sum now available ought to permit a recapitalization of all the banks that need it. Appraisals entrusted to outside firms, supported by the Bank of Spain’s services, will determine allocations to individual entities. It would not make sense to limit this support to the banks most in jeopardy. In a scenario of ongoing recession, even the more solvent ones will need a reinforcement of their own resources. This is a necessary condition for dispelling conjecture about our country’s financial stability.
Keeping the debt stable
Though the public deficit, and with it public debt, has not stopped growing since the crisis began due to the drop in state revenue, the Spanish case does not require a bailout such as those so far carried out in the euro zone. The conditionality natural in those bailouts should not be applicable to public finances, but to the banking sector. The moves made by the authorities since May 2010 are not very different in nature from those made in bailed-out economies. The Spanish public debt is still less than that of Germany or France. But private indebtedness, especially that of banks with its impact on international creditors, is barely sustainable without exterior support.
The sum now available is of sufficient quantity that the Spanish Treasury no longer need expose itself to auctions in the primary debt market, where the lack of confidence has been manifest for some time. The arrival of the new government not only failed to reduce the risk premium; it has since risen significantly. The recessive character of the decisions made and, especially, the precipitation in connection with the banking sector have done nothing to promote confidence.
This exterior support alone is not sufficient to dispel the threats that hang over the Spanish economy, but it was in every sense a necessary one. The new management of the Bank of Spain has to shoulder the errors of the past, and focus on what are now the priorities: the strict control of the banks, natural in a nationalized banking system. As well as the elimination of risk to the banking sector, the eventual resumption of credit to companies and households will be the signal that marks the beginning of the end of the worst crisis in recent history.
From now on it is possible to imagine a future in which we will begin to leave behind the economic nightmare that has afflicted Europe, though a good deal of further hardship may lie ahead in terms of unemployment, sacrifice and broken lives.