Analysis/Comment Dr Peter Morici: EU bailout no solution for Spanish banks
By Professor Peter Morici
Jun 12, 2012 - 8:03 AM
Chancellor Merkel and Mariano Rajoy, Spanish prime minister, on board a boat on the Chicago River, May 2012.
Dr Peter Morici: Pressured by other EU governments, Spain has asked the EU for €100bn in aid to
bail out its banks. European leaders say this amount well exceeds what is
needed, but they are miscalculating. As with Greece, the aid package is likely
too little to permanently quell investor fears that Spain’s banks will collapse,
and conditions imposed by Germany could make Spain’s situation worse.
Spain’s predicament is wholly different from Greece and Italy—its government is
hardly inclined to spend too much.
Prior to the global financial crisis, Spain enjoyed a boom in tourism and home
construction, as richer northern Europeans sought vacations and second homes in
its sunny climate. Robust construction and tourism drove growth and provided
Madrid with adequate taxes. Unlike Rome and Athens, it enjoyed persistent budget
Foreigners invested in Spanish bank securities, and the latter financed a hotel
and housing boom. In the wake of the financial crisis, loans defaulted and
Spanish banks were stuck with non-performing real estate loans.
Unlike the Federal Reserve, Spain’s central bank cannot print money to mop up
bad loans, and the European Central Bank is not empowered to bail out banks and
impose reforms. Hence, Spain’s national government had to borrow euro in
international bond markets to save its banks.
With real estate loans totaling more than €660bn, or about 65% of GDP, the cash
that must be raised is simply beyond the borrowing capacity of the Spanish
The IMF estimates Spain’s banks need €40bn in new capital, and as much as €100bn
to write off bad loans. Moreover, as we have learned from the US crisis, first
estimates of losses are likely conservative - - those numbers will grow.
Madrid’s borrowing costs may drop on announcement of the €100bn package, but
international capital markets will soon conclude it is too small, and Spain’s
government and banks will again face prohibitive borrowing rates.
In addition, Germany and other northern creditor states would like to impose
strict restructuring conditions on Spanish banks—prescribing mergers and
restructuring and winding down the weakest banks.
Outside meddling in this process could further weaken Spain’s banks and economy
by resulting in unnecessary absorption of its bank by Germans, Dutch and others
financial institutions—forced sales could make Spanish banks targets of
opportunity for bigger EU banks.
Historically, Spain’s banks have been well run and effectively regulated.
Spain’s current fix is much like Florida or Nevada after the big Wall Street
banks inflated US housing values by underwriting irresponsible mortgages through
networks of unscrupulous mortgage brokers.
Simply, Spain’s resort industry, home values and banks are collateral damage of
the wider global crisis and European recession. Indeed, the IMF, in a detailed
report published on May 30, found the core of Spanish banking sound, regulation
generally effective, and needed restructuring well underway.
Spain does not run its banks the way Italy and Greece ran their national
finances, and it doesn’t need German meddling in its financial institutions.
The IMF has noted the need for greater clarity for recapitalization strategies,
bank restructuring timetables, and certain improvements in bank oversight, but
Spain is not running a loosely-regulated Third World financial system.
As Germany is the largest country donor to the bailout fund, its interests and
reservations are understandable. However, it would be better to empower the ECB
to back up the €100bn bailout allocation, much as the Federal Reserve backed up
the TARP (US bank rescue fund), and for the ECB to oversee use of the funds and
implementation of IMF recommendations.
Professor, Robert H. Smith School of Business, University of Maryland,
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