Debt.

There are other elements which are used to relocate the responsibility from the banks to the state: but in light of the announcement today that the agreed bail out will be only applied to the banks it seems that in this case the European institutions have accepted that this is not Spain: the problem is indeed the banking sector.

The way the story has been reported here to date has already discounted that awkward fact: we have been told that this is some southern european version of "face": the government apparently wanted to avoid the "humiliation" of asking for help. The effect of that narrative is to allow us all to remember that Spain got a bail out and when it is pointed out that the banks got a bail out we already have an explanation: since the debt will appear on the sovereign account that will be easy to sustain.

It seems that Spain will not have to implement further imposed cuts: but since the government is already doing that there is no need. Spain has continued to follow troika prescriptions thoughout this mess. Much good that is doing in reality: though I am sure Ms Lagarde will soon come along to tell us what a great success this has been

The IMF made a report on Spain on 30/5/12, as it happens. It is here:

www.imf.org/external/pubs/ft/scr/2012/cr12137.pdf

According to them Spanish banks weathered the 2008 global crisis well due to robust capital buffers. Despite that they lost access to the wholesale funding markets. Since the eurozone countries only need to use the wholesale funding markets because they are members of the eurozone it seems to me that this is nothing to do with the Spanish government or the Spanish people. They are at the mercy of the market because the ECB will not act as a central bank even when there is no reason to doubt the solvency of the banks: at least that is how I interpret that passage.

The second phase of the problem arose because of the collapse of the property boom: and that is in line with what happened elsewhere: for example in Ireland. As in Ireland it seems that this was not to do with the government either: the banks lent more money than the houses were worth and pretended there was no risk because the loans were "asset backed". The comparison with Ireland ends there, however. Spain did not take over the banks debts wholesale, as the Irish government did. The government did offer some assistance and the small savings banks "restructured" by merging, for example the 7 which combined to form Bankia. Those banks were blamed in the report for "weak lending practices". It is frustrating that the IMF reports never do more than assert such things, but let us accept these banks were not prudent. Just like banks in the UK and the US and many other places. Lending and leveraging against assets was normal practice and the FSA concluded that nobody could have been expected to realise that this was insane: that is what is in the FSA investigation into the RBS debacle, anyway. So the IMF takes a different view with its hindsight: their track record of foresight is rubbish, but their hindsight is faultless so long as you agree with their theories and make reality fit their pre determined conclusions. At least that is how it seems to me.

The IMF goes on to say that the third wave of the crisis is still underway, reflecting concerns about the sovereign debt market. I do not see any link with the sovereign debt market: that is just sort of smuggled in, as usual. But even if that is sensible and accurate I can see no justification for forcing the Spanish government to take the bailout money and increase their debt if that is the source of the problem. There is never any mention of the fact that the transaction ought to be neutral because the nationalisation of the banks generates a balancing asset on the government's balance sheet. Yet if the story we are being told is true, that follows inevitably. Every debt creates a balancing credit, remember

I do not believe that, personally: If you buy a bankrupt bank on borrowed money I do not think it is a balance sheet transaction: I think it is more like buying chocolate and then eating it. But I am not an economist. They say that every debt creates a corresponding credit.

The IMF report then goes on to say that the restructuring of the banks was too slow. Restructuring seems to mean sacking workers and closing branches. This is the IMF answer to everything. It makes very little sense. If a bank has a lot of debt because it lent to construction companies and individuals on the security of assets which are falling in value then no matter what it does its "assets" are going to "deteriorate" so long as that goes on. Yet somehow the IMF report inserts an "as a result" after stating "restructuring was too slow" and before "the assets continued to deteriorate". The do not fill in the logical gap. Perhaps they could: but they don't.

Paragraph 17 is puzzling too. I invite you to read it for yourself and explain it to me. It appears to say that help was offered from the ECB which worked a bit: but increased the interconnection between the bank debt and state risk. That makes no sense at all: unless, of course the help was channelled through the state, as now. It doesn't say it was, but perhaps that is the situation: if it is, you can hardly pretend the government position worsened in terms of debt because it acted as a middle man: not unless you are an economist, anyway. Seems to me the whole thing is specifically designed to transfer the problem to the state: yet they discuss this as if it were an act of god.

Whatever it means the spanish banks did just what the british ones did when they got the quantitative easing money: they sat on it and continued to withold investment.

Apparently the Bankia bailout amounts to nationalising that bank, just as RBS was "nationalised" in this country: and as here, the ones that are not quite so obviously bankrupt are to get state money but with no strings attached. How does that make any sense at all? If you nationalise a bank then you don't need any others. So let depositors and pension funds in other banks transfer their money into your bank (which you will certainly have to pay for cos the banks haven't got their money any more) and let the rest take their losses and vanish. Why would you not do that? It is really fast restructuring and so obviously a damn good idea. And since that money is now in a secure place there is no reason for the customers to behave any differently than usual: so you can use a proportion of that money to invest in real things: and that will give folk jobs and give you a chance of getting your economy moving again. I really can't see what is wrong with that at all.

Anyway that is an aside and is not what it to happen. According to the report the two really big banks are fine. They account for 33% of banking assets and get most of their profit from abroad. So they can carry on as normal and there are no implications for the government that I can see: though they probably lend to the government at exorbitant rates on account of the sovereign debt risk which doesn't exist. Nothing to be done about that under current eu rules, apparently.

Then there are a group of former savings banks which have not been bailed out: they mostly hold mortgages. They are fine too, for now, because astonishingly, despite the horrendous unemployment and general lack of economic activity, people are still mostly paying their mortgages. Go figure.

The former savings banks which have had bail out money are also in the mortgage market: but they are in trouble cos they lent to construction and real estate companies: this will surprise you - they are not paying their loans. Those are corporations, remember: the folk we are all supposed to admire as risk takers and entrepreneurs and general saviours of mankind. In a pig's eye.

The fourth group are not savings banks they are described as medium sized and small private sector banks: though I think what they really mean is banks which operated for profit before the crash. They are in much the same positon as the bailed out savings banks: though they don't get singled out in the same way for some reason: as you can see in paragraph 21. I think their prejudicial underskirt is showing, personally.

Paragraph 26 is a doozy. Usual IMF crap presently best embodied in the pronouncements of their own dear Ms Lagarde: she is clearly not alone in her certainties. Paragraph 29 is a good contender for the title of crappiest paragraph in the report too, though. I especially loved this bit


That is really handy, isn't it? Ordinary folk just can't stand interest rate rises: but they can get along fine with no money coming in. All things work together for good in this best of all possible plutocracies...

And it just so happens that the country will benefit from keeping inflation low: even though it is admitted that the poor are the most heavily indebted and that knocks any possibility of relieving that pressure on them. But hey, inflation is a bad thing. In contrast the "increased flexibility" in the labour market is going to ensure their wages are kept low and there is a real chance unemployment benefit will be reduced as well. But as noted, income does not matter to them: they will carry on paying their mortgages and they will get export led growth in the sky, by and by

Unless, of course, the IMF projections are over optimistic: they almost always are, cos their theory doesn't work. If that happens it looks like we get more of the same for the people (rising unemployment is admitted: and it is already at 24%)

The report assumes a sovereign debt "haircut" and this appears to be based on their touching faith in the infallibility of the market: the cost of borrowing for the Spanish government is really really high and it wouldn't be if they were not in trouble, obviously. There is no possibility that the market makes speculative attacks and charges a lot for loans just because they can.... And George Soros is closely related to Santa and the Tooth Fairy

Do read paragraph 39 if you are asking just how far this report is based in reality: it is quite instructive.

It is almost entertaining when you get to the discussion of what else needs to be done. The report acknowledges that


Well that is a fact, though why they have done that is a complete mystery to me: it is to avoid undermining viable banks apparently. WTF? But the next bit is funny. Apparently they have required the banks to identify "impaired assets" and move them into a separate management unit. That does not of itself change the risk to the bank from those assets, obviously. So there are a number of options thereafter.

The banks could manage them and keep the risk
The banks could sell them to an Asset Management Company

They prefer the latter, and they say


Since governments are uniquely incompetent at everything in other parts of the forest that seems odd. But it does mean that the state gets to own all the really toxic stuff. A coincidence I am sure.

There are other options, one of which is a system wide Asset Protection Scheme. What that does is curiously described


That "third entity" magically turns into government by the end of the paragraph, unsurprisingly. The great advantage of this wheeze is explained: the assets remain on the bank balance sheet: but the risk weighting is reduced.It is cheaper to set up than an AMC. And best of all it avoids

Clearly the Spanish people should pay the piper: but heaven forbid they should call the tune!!

Who knew IMF reports could be so entertaining?

Edited by FionaK - 10/6/2012, 01:07