Posted by: Dirk | September 15, 2016

Spanish government pays hefty price for bank bail-out

According to Agencia EFE, the bank bail-out in Spain has left a slight fiscal problem (link):

El Estado ha recuperado 2.686 millones de euros de los 61.495 millones de ayudas totales que otorgó desde 2009 al sector financiero, lo que supone veinte millones más que los contabilizados hace algo más de un año.

In English: The government has gained back only €2.7 billion of the €61.5 billion that was given as aid to the financial sector since 2009, twenty million more compared to what was accounted for a year ago. Germany only paid €15.8 billion to save its larger banks, according to Handelsblatt. So, what went wrong?

In times of crisis, central banker usually follow the rule of Bagehot and lend freely, against collateral and at high interest rates, to those who are solvent. This should solve the liquidity crisis but it also means that insolvent banks will be gone.

In Spain, this was not applied. In Spain, all banks were saved, probably because the vast majority of them were insolvent. After the real estate boom many banks had a bad portfolio of assets consisting of billions of euros in real estate loans that turned into non-performing loans. The consequence of this is that the Spanish government will not get its money back because it lend to insolvent banks that probably will never repay the loans that the Spanish government gave them (against bad collateral, mostly real estate, I assume).

During the time of crisis, politicians probably did this to save the Spanish banking system. Europe (the EU) was not willing to step in, with Merkel saying that banking bail-outs are a nation-state problem. Of course, it is still dubious why the Spanish government should have bailed out its banks.

The Spanish CTXT magazine now has an article out (link) that is named “El no rescate de Rajoy, o cómo los españoles rescataron a los bancos alemanes”, in English: “The non-rescue of [Spanish president] Rajoy, or how the Spanish people saved the German banks”. Spanish banks owed hundreds of billions to German banks via the interbank market at the time of the crisis, and this was what seems to have mattered in terms of policy-making.

Advertisement: I explain the workings of the interbank market in the euro zone in my new book titled “Modern Monetary Theory and European Macroeconomics“, if you want to see some balance sheets modelled after real world institutions.


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