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The Doors of the Spanish Banks Crisis

by Richard Bayston
In the days before the announcement of the bailout of Bankia at taxpayer expense, Spain was looking anxiously through three open doors that in any case will no safe the property market.
Behind one of them was the spectre so feared by her politicians: the outright failure of Bankia. Had this happened, it would certainly have both deepened the crisis and spread it beyond Spanish borders. In addition, 10m Spaniards have accounts with Bankia and a further 400,000 are shareholders. If Bankia were to be allowed to fall, it would have needed to be lowered gradually, with careful monitoring from international institutions.
Carrying it on the back of the State at least seems to afford depositors and investors some protection –but as some of them open legal action to recover lost funds, the question is whether there is enough on the carcass to satisfy them all.

A second solution that still not impossible

The second alternative was an ECB rescue of the entire Spanish economy, and this is by no means impossible still. This option offered the most hope to the beleaguered Spanish economy, and was the only real chance for a more buoyant property market in Spain over the next few quarters. It would also have allowed Spain to restructure Bankia without the taxpayer footing the bill. A sensible use of ECB funds would have begun by recognizing the vulnerability of depositors and by giving insured deposits priority status under law.
However, both these doors have now slammed shut and Spain is left to travel in the same direction as Ireland did in 2010; the Spanish state’s bailout of saving banks leaves the Spanish taxpayer footing the bill, even as the economy slides further into recession.

Spaniards open a lawsuit

Pedro Lorenzo, retired from his small business as the economy slumped, speaks for the estimated thousand people who have signed up for a group lawsuit against Bankia: ‘They sold us something false,’ he says. ‘They knew what the bank was like. They didn’t tell the public the truth.’
It’s beginning to look as if the same accusations could be levelled at the Spanish government. The Wall Street Journal this week called the plan ‘short on details.’ In fact, the only details we can be sure of are that there is no money behind the Spanish banking system – for years, the only recapitalization option has been via the banks themselves – and the Spanish taxpayer has been elbowed into the breech.
As Spain’s financial sector falters, the housing market is sure to continue its quarter on quarter plunge, and some regional authorities have already resorted to using repossessed homes as emergency social housing.
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