Posted by: Dirk | July 22, 2014

Spanish bank bail out of Catalunya Banc costs government €11.5 billion

El Pais reports that the Spanish government has sold Catalunya Banc for €1.1 billion to BBVA. The newspaper writes:

Esta operación supone que los contribuyentes pierden definitivamente 11.839 millones de euros, una cantidad que se acerca a los recortes en sanidad y educación hasta 2013, que suman 13.800 millones.

La entidad, que llegó a ser la cuarta mayor caja de España, tenía unas ayudas directas del Estado de 12.050 millones y otros 572 millones inyectados posteriormente por el FROB para la venta de la cartera de hipotecas tóxicas. En total ha puesto 12.622 millones y recibirá 783 millones con la venta porque solo tiene el 66% de Catalunya Banc. La operación incrementará el déficit público porque el FROB valoró en sus libros a Catalunya Banc en 1.858 millones y percibirá 783.

So, the tax payers lose definitively €11.8 billion, which is about the full amount of cuts in health and education until 2013, which stand at €13.8 billion. The bank, which was the fourth biggest of Spain, had direct aid from the government of €12.05 billion and another €572 million from the sale of the toxic mortgages from the ‘Fund for Orderly Bank Restructuring’ (FROB). The public deficit will go up as a result of this operation because FROB valued Catalunya Banc at €1.848 billion and will receive €783 million.

This is what happens when you bail-out a bank that is not illiquid, but insolvent. I think that there needs to be a discussion why you use €11.5 billion for bank restructuring, which then become a definite loss, and not for propping up health care, education or other government services which have been cut harshly over the last years. The Spanish governments (Zapatero, Rajoy) had a political choice to increase taxes or cut government spending, to bail-out their insolvent banks or to let them fail in an orderly way (yes, there are rules for that), they had the possibility to press for a European solution because Spanish banks owed German banks hundreds of billions of euros on the interbank market, they could have pressed for a less harsh interpretation of the deficit rules, etc. Whatever they did, the results have basically been zero. Yes, they kept Spain in the euro zone, but that is the status quo and it is unclear whether it was a good idea to stay in, given that the institutions (fiscal rules, banking regulation) are what they are.

Reality is constructed through politics, and politics can be quite one-sided. That, it seems to me, is the lesson to be learned from Spain, where creditors are saved once and again at huge fiscal costs while youth unemployment stands at 54%. Spain’s GDP today is still below that of 2007.

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