Spain's banking pain is eased, not cured
So, either the next piece in the jigsaw puzzle of stabilising the eurozone has been put in place or a small sticking plaster has been used to try to patch up a gaping wound – it depends on your point of view. Approval for the transfer of €37bn of ESM funds to the Spanish banking system will be seen as optimistic as the former and by pessimists as the latter. In a sense, it is both but neither.
In fact, the conditions attached to the funds are draconian and will see a once buoyant banking system which grew with an equally buoyant construction industry begin a “shrink to fit” process. This is not, as it may appear, entirely being imposed by the EFSF but also to a large extent by the stark reality of a changed and still changing economic environment.
I wrote an article in the Daily Telegraph a couple of years ago in which I argued against rushing into over-regulation of bankers’ compensation on the basis that all this would self-right over a period of time and that the bloated banking industry would resize itself under the laws of natural selection.
What the EFSF conditions will have done is to have put the kibosh on any thoughts of back-room deals between the government and the banks which would have possibly attempted to trade financial aid against the promise to preserve jobs. As we now know, the conditions are to the contrary and have made swingeing cost-cutting a condition of support. Although many of us – myself included – were sceptical when it was mooted to bypass Madrid and send aid directly to the Spanish banks, it looks as though, for once, there is no grand Eurofudge can-kicking contest being launched.
Whether the capital which is being injected will prove to have been enough – the €37bn is just a first tranche of a forecast total of €55bn – has to be seen; some observers are not at all convinced.
This is, however, the first step in the brutal slash and burn of a banking system which was built in the same dreamland swamp as the 1m completed but unsold residential properties which are scattered around the Spanish landscape. The numbers of future job losses vary but 30,000 seems to be number that comes up again and again. That’s more than just harsh in a country where the adult unemployment rate is already running at 25%.
Having highly educated workforces is all fine and dandy but there are no jobs out there and I am reminded of a joke which went around in the post ’87 crash period: “What do you say to a Harvard MBA? Two Big Macs and a large fries please”. Now, sadly, that really is proving not be a joke at all and I supposed will be replaced by “What do you say to your local bank manger? Would you please weed that bed as well.”
However, the process does not stop at the banks’ doors and subordinated bondholders will be taking some pretty severe haircuts too with BFA-Bankia junior bondholders looking at capital write-downs of between 14% and 46%.
The pain in Spain stays mainly … not mainly at all but with all stakeholders. I can’t argue with that and I take my hat off to the ESM for blowing the gaff on the sense that all is well and that European debt problems can be resolved by a bit of deficit trimming, some smart accounting and a dose of rhetorical tinkering. See what happens when you take the decisions out of the hands of elected politicians. Well played, chaps.