Since the crisis began Spanish authorities have been denying emphatically any risk for the Spanish banking sector. In fact the reality was other and well known at least since May 2006 when a group of Bank of Spain inspectors warned of an insurmountable pile of debt growing behind the real-estate bubble while the regulating and economic authorities looked elsewhere celebrating the “Spanish miracle”.
As soon as international finance markets froze, Spanish banks became unable to roll over the loans they got from European core banks but this was presented as a crisis of liquidity. For a while they relied on the facilities of the ECB backed by Spanish State guarantees and sovereign bonds. In the LTRO operations last November and February they were able to borrow up to EUR 100 billion which provided for refilling the ATMs and repaying due debts, hopefully at a discount. This combination of drip-feeding with occasional massive injections of money has kept the liquidity problem at bay but has had no effect on the real disease which is one of solvency.
The solvency problem of Spanish banks lays within bad loans, in particular those to real-estate developers. While the household indebtedness is punitive for the incumbents the rate of non-performing loans remains manageable for the banks because the former will do any sacrifice before losing their homes. But the loans to the real-estate business amounting to EUR 400 billion are different as they suppose a formidable deadweight with very slim chances of recovery. This adds to an economy depressed by austerity where more and more loans turn bad as time passes by.
This problem, which is known since the very beginning, has been carefully hidden until now. Semi-public Savings Banks have been privatised and whenever one of them has appeared as insolvent it has been merged with others so the outcome is a larger insolvent institution. Bankia is the creature of one of these financial engineering operations. Chaired by former Popular Party Minister of Finance and later CEO of the IMF, Rodrigo Rato, it has lived a short life as the largest bank in the country when it went public last summer, as the result of the merger of several Savings Banks.
Now the Spanish State is struggling to raise EUR 24 billion to recapitalise Bankia that must be found after forcing a EUR 10 billion cut in health and education down the throats of Spanish people. Nobody knows which bank will come next though there are several candidates. An “independent” audit is to be carried out to delineate the real problem but it will be done by the same who proclaimed Anglo Irish the “best bank of the world” two years before it went bankrupt. How much comfort these audits will furnish to the large French, German and Belgian banks which happily bought MBS and bonds issued by their Spanish colleagues during the good old times? Most of this paper is now endorsed to the ECB which also holds a creditor balance of EUR 270 billion against Spanish financial system through the Target2. These are numbers giving hints of the scale of magnitude of the problem as compared with Greece, Ireland or Portugal.
Coming out of this zombie setting can prove very costly for Spanish ruling classes. Either the funds are found in the exhausted public accounts or Spain turns to ESM funds to recapitalise Spanish banks which amounts to handing control of the financial system over to “Europe”. The first way will surely give rise to a high tide of protests and its feasibility is not even clear. The second means loosing the major stronghold of Spanish bourgeoisie, the financial industry, which has casted its shadow over the democratic transition, EU accession and the birth of the Euro, falling ultimately prey of its own success.