Antonio España.- 06/13/2012
Imagine a guy walking down the street when he suddenly falls into a hole. The walls are so steep he can't get out. A doctor passes by and the guy shouts up, 'Hey you. Can you help me out?' The doctor writes a prescription, throws it down in the hole and moves on.
Then a priest comes along and the guy shouts up, 'Father, I'm down in this hole can you help me out?' The priest writes out a prayer, throws it down in the hole and moves on.
Then a friend walks by, 'Hey, Joe, it's me can you help me out?' And the friend jumps in the hole. Our guy says, 'Are you stupid? Now we're both down here.' The friend says, 'Yeah, but I've been down here before and I know the way out.'
The news of the European rescue of the Spanish banks this weekend, made me recall this parable that appears in an episode of the TV series 'The West Wing’. The characters are clearly identifiable: the man in the hole is Spain, the doctor and the priest could be perfectly Paul Krugman and Nouriel Roubini, two prestigious economists, and the friend who jumped in the hole with a credit line of €100bn on very favorable conditions would be the Eurogroup.
However, I’m afraid that our history has some differences that might not involve the same happy ending. As a matter of fact, our friends -- some of whom were down here at the beginning of the crisis and spent much of its gross domestic product to rescue its banking system while former Spanish Prime Minister José Luis Rodríguez Zapatero buried the budget surplus in the trenches of Plan E -- have not come to get us out of the hole but to help us dig deeper.
That is precisely what the agreement reached past Saturday is: to try to solve a debt problem with more debt. As Daniel Lacalle says, kicking the ball forward.
Is this "rescue" good for Spain?
Peter Drucker, well-known management guru, used to say that ‘If you're in a hole, stop digging!’. That is precisely the opposite of what we are doing.
I suggest you do the calculation of what we have spent on our financial system since the bubble burst. Authors of a renowned Spanish economics and investment blog have made the numbers this weekend and have quantified it in 168 billion (Gurusblog, Las ayudas a la banca española desde 2008 ascienden a 168 mil millones de euros, in Spanish).
That’s only considering public support of the national government. We should also take into consideration the three years loan granted by the European Central Bank through the mechanism of Long-Term Refinancing Operations (LTROs).
As we could read on Monday in one of Kike Vazquez pearls, Spanish banks have used this line up to the not inconsiderable amount of €195bn. Undoubtedly dizzying figures to which we still will have to add the final amount to be injected through the FROB, the Spanish bank bailout fund, from the credit line of €100bn. In short, piling up debt on top of debt on top of more debt.
Prime Minister Mariano Rajoy and Finance Minister Luis de Guindos can dress the financial assistance as they like. They can say that it is not really a bailout, that it does not count as public debt, and that it does not generate additional deficit. But reality is obstinate, and no one can deny that this is a loan granted in a critical situation with favourable conditions compared with the market ones, whose MoU is to be signed by the government and not by the banks themselves, and that if interest instalments do not count as deficit will be thanks to accounting engineering.
Another merit sold by our government officials as one of the main benefits of this arrangement is that there will be no macroeconomic conditionalities. Something, though it is desirable for the politicians and bureaucrats, which can thus maintain their privileges and power preserves -apart from sparing them the embarrassment of subjecting to the supervision of the so called men in black- to rest of us, citizens, is not good news. Any hope of having someone tackling the seventeen small Greeces we have in our country, has vanished.
And do not think that, after receiving the injection of €100bn, bailed-out banks are going start lending again as though there were no tomorrow. First, because families and SME’s are still buried in debt and are immerse in a slow process of deleveraging. And second because large companies are more concerned with reducing the cost of its debt than thinking of initiating new investment projects in an uncertain environment like the present.
Therefore, answer is no. This rescue is not necessarily good for Spain. It may have served to gain time, especially in the face of the uncertain outcome of the election Greek next weekend, but I fear it must have been in vain.
Note that measures effects on markets are increasingly shorter. Yesterday, the euphoria lasted only a few hours. We started the day with the Ibex up more than 5 percent and the risk premium on more than 460 points and ended the session in negative -stock market falling 0.54 percent- and with the risk premium at 520. What happened is that investors do not trust the medium term, quite simply because they know that we have not solved the problem, but we just postponed.
Is there an alternative to this "bailout"?
Yes. Indeed there are much better, more efficient and fairer alternatives to the rescue announced this weekend. One of them, certainly the most permanent and definitive, is that of Professor Huerta de Soto that we introduced here a few weeks ago, although we must admit is more complicated to implement because the broad consensus at European level that would require.
Another one, that would not prevent a new credit expansion in the future, but would give a more robust and fair solution to the banking crisis is the one recently proposed by the think tank Instituto Juan de Mariana (available at this link, in Spanish). Put it simple, this consist in turning creditors and bondholders into shareholders, of course, diluting the capital of existing stockholders. After all, what is usually done with distressed companies that are not lucky enough to be a bank.
In any case, local and European authorities have opted for the kicking the ball forward strategy, so I’m afraid we'll talk about it again sooner rather than later, as we have missed closing the bail-out.
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