Federico Garcia Lorka’s 1932 play The Blood Wedding (Bodas de Sangre) focused on a wedding that, in the end, never took place. It symbolised the long shadow cast by a hidden crime upon the nation’s dallying with the prospect of deliverance. It also foreshadowed the tragic events that consumed, not just the playwright, but the whole nation, only a few short years later (as captured in Picasso’s Guernica better than by any historian’s pen). Today, we have another Bodas de Sangre in the making. A postmodern version. All of the tragedy’s elements are here, except for the splendid prose and poetry of a Lorka. Instead, we have inanities from Mr Rajoy, from Brussels and from Frankfurt. Meanwhile, a stunned audience in Madrid, in Dublin, in Barcelona, in Cork, in Paris, Athens and Rome are watching, listening, eager for some ray of hope. To no avail. For there is none.
Spain treading on Ireland’s shaky footsteps
Spain’s pain is not novel. It is a carbon copy of Ireland’s. A period of ponzi growth was occasioned by money-capital fleeing the metropoles of financialised capitalism, toward places like Spain and Ireland, in search of higher returns. It found its lucrative returns in a bubble created in the real estate business, aided and abetted by local banks, developers, politicians. Then, Wall Street came crashing down, capital fled (as is its wont at times of financial implosion) and the losses of the banks were passed on to states (the Spanish and Irish governments) which had been, interestingly, running a very tight ship for some time before the Crash. The change in political personnel made little difference. No state, however tightly or austerely is run, can survive (a) once mountains of losses are deposited on it, and (b) when it has no Central Bank of its own to help it remain afloat.
Just like Ireland’s government almost two years ago, so Spain’s now went through the same emotional cycle. First, they refused to accept that the state and the ‘national’ banks were embraced in deadly embrace that condemned both to insolvency. Denial caused angry rejections of the notion that the country would seek EU assistance. However, frustration was bound to follow the realisation that no other avenue was open to them. And, lastly, the bailout was announced in almost triumphant terms – as the road to national recovery and a demonstration of the wonders of European solidarity.
Tragically, of course, Spain’s ‘bailout’, exactly like Ireland’s, will achieve none of that. All that has happened is that proud nations like Ireland and Spain have now joined Greece and Portugal in the Workhouse that is the EFSF-ESM; the Temple of Ponzi Austerity. Structured as a giant CDO, the whole edifice is spearheading the disintegration of the Eurozone, with untold costs for the whole of Europe. If Greece was the canary in the mine, and Ireland the harbinger of a systemic Eurozone-wide crisis, Spain is the portend that Europe’s Reverse Alchemy has now began, dissolving the fabric of countries that, unlike Ireland, are too large to ignore.
Yet again, Europe avoided doing the rational thing
What would the rational thing be? For two years now we have been shouting from the rooftops (in the context of our Modest Proposal – see Policy 1) that unifying the Eurozone’s banking systems is a prerequisite for arresting the Crisis. A single currency area cannot afford to have separate banking sectors that are supervised by national governments. It is nonsensical to speak of Spanish banks, French banks, Irish banks and German banks when, by Treaty, Spanish and Irish citizens have the right to wire their deposits at will from one jurisdiction to another, with these transfers immediately switching from ‘assets’ of one national Central Bank to the ‘liabilities’ of another (i.e. the Target2 and ELA system of within-Eurozone capital movement accounting).
What would that mean in practice? It means that the moment a nation-state is incapable of keeping afloat its ‘national’ banks, following a financial and real estate disaster, the recapitalisation of banks must not only be done with European money (as in the case of Ireland and Spain, among others) but, crucially, it must be taken out of the nation-state’s business (and national accounts) altogether. In short, banks must be Europeanised. Period. That would mean three things:
- Banks must be supervised by a proper European Banking Authority (which unlike the current EBA should not be a confederacy of national banking authorities)
- Capital injections from the EFSF-ESM must proceed in exchange for common shares that the EFSM-ESM then holds, and which are used in association with the reconfigured EBA to appoint new managements in the failed banks that are at an arm’s length from national politicians (thus, dissolving the cosy relationship between national politicians and bankrupt bankers)
- These capital injections should not add to the sovereign debt to the nation, as the banks will no longer be national but Europeanised institutions.
When Stuart Holland and I suggested the above, two years ago and as part of the Modest Proposal, our suggestion was met with a deafening silence. Nowadays, it is almost a conventional wisdom (see Lorenzo Bini Smaghi’s recent article in the FT). A conventional wisdom which, nonetheless, Europe’s powers-that-be have chosen to ignore.
What they did: The essence of the Spanish ‘bailout’
It is now clear that of the three recommendations above none will be implemented. The third one, and most important for the purposes of ending the deadly embrace between state debt and banking losses, has been roundly rejected: The money that will flow from the EFSF-ESM into Spain’s banks will weigh heavily upon the Spanish state’s public debt. Just like in the case of Ireland, but also Greece and Portugal.
The second recommendation is, quite scandalously, ignored as well. Europe’s taxpayers’ money will flow to the banks but, yet again, Europe’s taxpayers will receive no equity in return. Will Spanish taxpayers receive it? Possibly, even though judging by the Greek example it is not certain. But even if they do, it is a poisoned chalice since that equity will come hand in hand with the spiralling out of control of the death dance between their state, their recession and their banks.
Only with regard to the first recommendation is there some mention of enhanced EU supervision of the Spanish banks. But unless we have a new EBA that is empowered to carry out its own stress tests and accounting checks, rather than through the Spanish supervisory authorities, none of this is credible.
In short, of the three things that Europe had to do in order to address Spain’s banking crisis they did almost none.
Difference with Ireland’s bank bailout
The Spanish ‘bailout’ differs from the Irish in four respects. These differences suffice for the Irish people to demand of their government to renegotiate its deal with the troika. But they are not such as to justify Spanish hope that the Spanish ‘bailout’ is a ‘lighter’ version that Ireland’s and, thus, that it offers hope denied the Irish. Let’s look at the fous differences one at a time:
No IMF involvement
Unlike the past three ‘bailouts’, the IMF will not be lending Spain any money. It will just play the cameo role of Sherriff to the EU-ECB’s protagonist part as Lord and Master. The explanation for this is that the Spanish bailout has been proclaimed as a partial program; a euphemism that allows both Madrid and Brussels-Frankfurt to maintain the illusion that the Spanish state does not require assistance; just the banks. But because the IMF is not allowed by its own charter to inject money into banks, it chose to ‘sit this one out’, providing only ‘technical’ assistance.
I buy none of this! Now, I would have no objection to the claims that (a) an EFSF-ESM recapitalisation of Spanish banks might have helped the Spanish state overcome its fiscal crisis, and (b) that the IMF’s charter stops it from helping just Spanish banks IF AND ONLY IF the ‘bailout’ billions did not count as part of the Spanish state’s sovereign debt. Then, the banking crisis could have been decoupled from the state’s fiscal crisis and any IMF contribution would have violated its charter. But since our recommendation no. 3 (see above) has been ignored, and Spain’s debt will burgeon, then the Spanish situation remains hopeless and the IMF’s excuse for ‘sitting this one out’ strikes me utterly unconvincing (think about it: since any monies lent by the IMF would have been added to Spain’s debt, it would have injected money into banks only via the national coffers – just like it did with Ireland).
In conclusion, the absence of the IMF in the Spanish case has nothing to do with the Spanish ‘bailout’ being one for the banks whereas the Irish one was for both the state and the banks. As long as the sovereign is lumped with the money that will end up with the banks, the Irish and the Spanish cases are indistinguishable. The only difference is that the IMF is, clearly, becoming jittery with Europe’s bailouts and was looking for an excuse to stay out of this one; in view of the enormity of the Spanish black hole. A decision that Madrid welcomes as it tries to convince the world that its ‘bailout’ is not really a ‘bailout’. At least not of the sort that afflicted Ireland (not to mention Greece and Portugal).
No strings attached, i.e. no formal austerity program
Before the Irish ‘bailout’, the Fianna Fail government of the time had already imposed upon the Irish people harsh austerity measures that were much applauded by Brussels, Frankfurt and Berlin. Yet, when the time came to sign the troika deal with Dublin, Europe demanded further austerity measures. Not because they made macroeconomic sense (quite the opposite was true) but because Berlin insisted that any ‘bailout’ should be portrayed to other Eurozone members-states as entering a hideous Workhouse that no able bodied worker, or nation as in our case, would ever step into voluntarily.
Spain has also imposed upon itself savage austerity measures over the past two years. Of course that, in itself, would not stop Berlin from insisting on new austerian strings attached to the Spanish ‘bailout’ – as they did in Ireland’s case. However, there are two differences with the Irish case.
First, between the Irish and the Spanish ‘bailouts’ we have 18 months of the Crisis’ evolution. During these 18 months, the ECB has unleashed its 1 trillion LTRO as a backdoor ‘bailout’ of Italy and Spain. However, before going ahead with this the ECB had negotiated both with Rome and Madrid massive austerity and ‘reform’ (effectively attacks on the rights of workers) packages. Packages that were implemented by Mr Rajoy and Mr Monti. In addition, Spain has cut 27 billion from its budget this year and has promised to repeat this bloodbath next year. In short, Europe has already exacted its pound of flesh from Spain during the past few months.
The second reason is that the scope of deterrence has diminished as contagion has spread to… Spain. Indeed, the point of putting Ireland in the Workhouse was to deter Spain from seeking refuge there. But now that Spain has been admitted into the same Workhouse, what is the point of imposing further cruel and unusual punishment on it – especially given that it is in agony anyway? Who is going to be deterred now? Italy? Given that Mr Monti is valiantly trying to introduce the policies that Berlin wants, and given that it is now evident that entering the EFSF-ESM is not a matter of choice (for the purposes of shirking austerity’s logic), the formal announcement of a new austerity program for Spain was deemed unnecessary. In any case, informally, the Spanish people should brace themselves for a spike in austerity, following this ‘bailout’, much like the one the Irish have been suffering (on the behalf of their bankers) since their own was signed and sealed. Only it will be called something different…
The possible involvement of the ESM
It is not yet clear which part of the Spanish ‘bailout’ money will come from the existing EFSF and which from the soon to be introduced ESM. This matters because the larger the portion of the ‘dough’ that comes from the ESM, the worse the bailout’s impact on the Spanish state’s refinancing (or fiscal) crisis. Why is this? Because national debts to the EFSF have no priority over other debts whereas debts to the ESM have priority (or super-seniority, IMF style). This means that for every billion that the Spanish government borrows from the ESM (as opposed to the EFSF), investors around the world will know that, if Spain at some point cannot repay its loans, they they stand to lose (with certainty) a larger portion of their investment (as the Spanish state is forced to repay the ESM every last euro before repaying other creditors). Which means, of course, that private investors will be even more reluctant than now to lend Spain. Which means that Spain’s bankruptcy is that much closer. At least Ireland has, so far, avoided this trap – although any new loans that Dublin gets (as a result of the Irish people voting ‘correctly’ at their referendum) will probably come from the ESM.
Real estate prices have not bottomed out in Spain
Ireland lives in fear of the extent of its banks’ future losses. The Irish state has effectively guaranteed the Irish banks’ future losses (contingent debt) without having a clue as to what these losses will be. However, at the very least, there is some degree of confidence that real estate prices (which are closely connected to banking losses) have bottomed out in Ireland. This gives the Irish a smidgeon of clarity. The future does not look good but at least there is less fog surrounding it. In Spain, by contrast, the downward dynamic of real estate prices is nowhere near a resting point. Some say that real estate has another 40% to lose before it reaches equilibrium. Which means that the banks’ black holes may be much larger than it seems. And given Europe’s determination not to Europeanise the banking system, this means that Spain’s death dance is at an early state (when compared to Ireland) of its repulsive progress.
Conclusion
Spain could, and ought to, have been the terrain on which to end the deadly embrace of public debt and banking losses that is bringing the Eurozone down. Europe, in its infinite idiocy, decided against such action. The differences between the Spanish and the Irish ‘bailouts’ are real but insignificant. They are real enough to encourage the Irish to question their own bailout’s terms and conditions. But they are not substantial enough to give out any hope that Spain has been helped. Instead, it is abundantly clear that a new Blood Wedding (between banks and the state) is the order of the day in the land of Cervantes, Lorka and Picasso. A Wedding that will never be consummated, courtesy of the unspoken crime that overshadows it. And just like Lorka’s play, it will end up in a blood bath of unwarranted pain and desperation that threatens to consume, just as it did in the 1930s, the whole of Europe.
