Cogito Ergo Non Serviam

Trading Shares in Spain's Bankia Suspended

The trading of shares in Spain's troubled Bankia bank has been suspended ahead of a board meeting this afternoon. The board plans to ask the government for about 15 billion euros to keep the country's fourth largest bank afloat. While the other big Spanish banks have been seen their ratings downgraded by the rating agencies of late, the official word is that Bankia's woes are an exceptional case. However, it is no coincidence that this trouble occurs at the same time that rumors of German flexibility on eurobonds are rising. Spain, and not Greece, is where the eurozone will sink or swim.

Bankia is the result of the 2010 merger of seven regional savings banks that had exceedingly heavy exposure to Spain's toxic property market (between 1996 and 2007, property prices in Spain tripled). Although the worst of the assets were moved to a holding company called BFA, Bankia still holds 32 billion euro of bad mortgages. Four attempts by the government in Madrid to fix the banking system have yet to produce stability.

What is particularly shameful is that this disaster was not caused by Spanish government profligacy. In 2007, the Spanish government's debts were just 36% of GDP, while the German government's were 65%. Moreover, tax revenues were running ahead of expenditures. What everyone forgets is that Germany consistently violated the terms of the Maastricht Treaty by running a budget deficit above 3% with some regularity. Instead, the mess happened because Spain's interest rates fell to historic lows when the euro started in 1999. Local banks, property developers and home-buyers went on a housing spree, and the property bubble has now burst.

And who loaned Spain all of the money? German and French banks. Now that the property bubble has burst, they want their money back. They are moving euros out of Spain, decreasing the money supply, and Spain has to borrow to replace that in order to pay its bills. And it borrows from the European Central Bank through the Bank of Spain. The BBC notes Spain "now owes the ECB 285bn euros, or 27% of Spain's GDP, and rising. And it isn't just Spain's central bank. For similar reasons, the central bank of Italy has now borrowed about 279bn euros from the ECB, or 18% of Italian GDP, while those of France, Greece and the Irish Republic have taken about 100bn each." The Beeb adds that the ECB gets its funds from Germany and, "as Germany's banks have steadily demanded the return of the money they lent to Spain, Italy and the rest over the past 10 years, Germany's central bank has had to step into the breach."

And this is why reports this morning suggest some flexibility in Germany over eurobonds, that is, the joint liability of all eurozone governments for sovereign debt within the zone. Reuters reports that Italian PM Monti said,"'Europe can have euro bonds soon.' Germany has an interest in ensuring no country leaves the euro, while Greece will probably remain in the currency region even as 'anything can happen,' he said. 'A united Europe is in Germany?s interest,' Monti said. 'We'll have euro bonds if the euro area, and therefore Germany, will want them'."

Meanwhile, the German opposition parties, who have won the recent local elections, are pressing Chancellor Merkel to bend. Reuters continues "Sigmar Gabriel, chairman of the main opposition Social Democrats, said that while no 'concrete results' were achieved [in talks yesterday], he had the impression 'the government's blockade on growth has been broken. We pointed out once again that the five wise men economic panel proposed a redemption fund to the government, which would be a good opportunity to break away from the rigid debate over euro bonds. We heard from our European friends yesterday that that they regard it as a good proposal. Still, the government is so far being extremely reticent with respect to this proposal too, even if not rejecting it'." Chancellor Merkel needs opposition support to win the 2/3 majority required to pass Europe's budget enforcement treaty and associated legislation setting up the permanent rescue fund before parliament's summer recess on July 6.

Germany can let Greece fail; it's too small an economy to really matter. Spain is a different case.

© Copyright 2011 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.



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