El Pais reported some days ago that the Spanish government’s bank rescue fund – Fondo de Reestructuración Ordenada Bancaria (FROB) – has lost 36 out of 52 billion euros spent on nationalizing the Spanish “cajas”, which are regional banks. Here is the main paragraph:
La historia del rescate de las antiguas cajas nacionalizadas es un cúmulo de malas noticias. Y lo peor es que las últimas siempre superan a las anteriores por desgracia para el contribuyente, que es el principal pagano. Este viernes se conocieron las cuentas de 2012 del Fondo de Reestructuración Ordenada Bancaria (FROB), que asume que se perderán la mayor parte de las ayudas a la banca. La conclusión es que el fondo de rescate da por perdidos 36.000 millones de los 52.000 millones que inyectaron el año pasado en Bankia, Novagalicia (NCG), Catalunya Banc, Banco de Valencia, Caja España Ceiss y BMN. Son unas cifras similares a los recortes en Sanidad y en Educación.
So much for the idea of bailing out banks and making a profit. In a currency union this does not work like with a sovereign currency. If you have a problem of a financial crises but you have a sovereign currency the government has deep pockets. It can spend as much as it wants. Also, the exchange rate helps with the adjustment. A depreciation should make imports fall and exports rise, at least in the medium term. However, in a currency union with a central bank that does not directly finance the governments, the situation is different. Bailing out the banks alone will not repair the economy. There is no exchange rate adjustment and no fiscal stimulus, so its is unlikely that the value of the Spanish real estate increases in domestic currency terms.
If we want the euro to survive, then we must think about the resolution of banks. Spanish banks lent hundreds of billions of euros from German banks, which are at stake. Why should the Spanish government and, therefore, the Spanish tax payer bail out Spanish banks working to a large extent with German money? Why repeat the Irish mistake? The euro was an experiment from the beginning, but it is now time to learn the lessons from the flawed design and transform the way the currency works.