J. Luis Martín.- 07/22/2012
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.”
J. Luis Martín is director of trumanfactor.com
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