Having taken a (relative) break from blogging it's all too obvious how rapidly world events are developing.
Spanish banks are now recognised to be broke.
If we are candid, so too are the UK's banks. Tim Bush at PIRC reckons their undisclosed losses are between £40bn and £80bn, and knowing Tim as I do I am sure he is right.
Portugal is bailing out banks.
The Irish have voted to accept austerity, a loss of sovereignty, the exodus of their young and the loss of hope which has always been such a part of their national narrative.
And still those in power don't get it. Merkel insists against all logic that all Europe can be like Germany. Osborne demands that we have austerity even though it has obviously failed to deliver growth and jobs. The bankers demand investment from the government and cuts in spending, all at the same time. The incoherence is palpable.
And throughout it all things just get worse. As self interest is the dominant and prevailing sentiment (indeed, some would argue, the only acceptable logic in economic theory; although that's wrong) Germany with the capacity to pay for its mistakes (and it was its mistake to lend to the indebted nations and its mistake to not require the Euro area to clear its debts) is refusing to accept its duty to bear the cost of those mistakes. And its similar refusal to allow the creation of new money has much the same effect: its phobia about inflation is demanding in its place the sacrifice of nationhood and democracy to that paranoia. We've been here before.
And what is sickening is that there are alternatives.
The banks could be saved. They would, admittedly, have to be nationalised. Quite clearly there are almost no solvent banks across Europe. But the property and sovereign debts that are leaving their balance sheets tattered could be replaced. Property debt does not repay immediately; it could be replaced with government bonds designed to produce liquidity at the time the lost value would have done. There is no need to print money now in that case. The capital and asset values of banks can be restored over time in that case with limited inflation impact.
And as for sovereign debt; of course it is an issue, but the reality is that the reason why it is such an issue is that the EU insists that governments can only borrow from markets. This is absurd, as the UK has shown. The reason why the UK is avoiding some of the problems of the Euro area is because of our QE programme. £325 billion now, and rising, this has in effect done two things. Firstly it has paid for almost all the deficit for the last two years. Second, the debt is immediately written off in the case of the UK. Almost all the debt we've issued in the last couple of years is, in effect, now owned by the Bank of England, which is owned by the UK government and debt owed to yourself is debt you don't have to worry about!
Of course, even more effectively, the Bank of England could lend directly to the Treasury, cutting out the commercial bank middle-man that is simply enriching a few at cost to the vast majority and making the consequences of this crisis so much worse in the process. And that is what should be happening in the EU as well. To argue that there is no money is absurd: money is costless to create and need carry no interest rate. If that is what we're short of at this moment it is a travesty that we'll put human rights at risk to preserve banker's margins.
So, there are Eurozone solutions. Banks can be recapitalised with debt which has limited obligation to turn into cash now, giving rise to very limited cash injection in the economy. And if only the Eurozone (or let's call it Germany) would agree an effective QE programme, whether through banks or not, the sovereign debt crisis could also be managed - with the debt being issued to address it either being cancelled in due course or simply never being repaid - as is always an option in these cases.
But there are conditions to this survival. It requires that banks pass into public ownership. Second it requires that the commercial banks monopoly on making money - the last of the mercantilist monopolies and in many ways the only one to survive into the modern capitalist era - be abolished.
Will anyone have the courage to do these two things? And will they have the courage to put in place the capital controls and the regulation of offshore that are an essential part of making them work? In times gone by I would have said no.
But these are not ordinary times. The choice now is somewhat clearer. The choice now is between the rights of banks and bankers on the one hand and the survival of democracy and the nation state on the other. To put it another way; this is about preserving all those hard won gains that generations literally fought for, and the rights of billions in the future to share in the rewards they won, or the right of an elite to control in their own interests.
Which is it to be?
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Quick question, because there is a step I don’t understand, if you don’t mind. It arose from reports about Spain’s bank problem.
What was said was that:
1. Spain’s banks are in trouble and need a cash injection.
2. The Spanish government wants the cash to go directly to the banks as it is them that are in trouble
3..EU rules do not allow this: money has to be channelled through the state
4. Therefore bailout money increases the national debt
What I don’t understand is this:
a. If the money goes to the Spanish government it presumably then lends it to the banks.
b. According to orthodox theory every debt liability has a corresponding asset
c. If that is true the worst that can happen is that the transaction is neutral so far as Spain is concerned
d. It seems possible that it could actually reduce sovereign debt depending on the interest charged on the loans to the bank
e. When europe lends to a state it imposes conditions
f. It follows that if a state lends to the banks it can equally impose conditions
g. The state can therefore require that the banks use the money to repay deposits from ordinary people and money owed to pension funds
h. After that the banks can go hang, because it is those liabilities which blackmail us into helping them
i. That jmoney is then with depositors and pension funds
j. The state can then require them to give it to the state for use in rebuilding the economy
I do not understand why this requires the state to accede to europe’s demands for austerity: for there is no rational reason for the imposition.
I can make no sense of it unless the problem is liabilities to other creditors: who they?
Is it possible that the truth is these are not “Spanish” banks at all, and that is the problem?
I’ll try, but it may be later
Fiona, these are unquestionably Spanish banks. They are the second tier – the regional savings banks – some of which are partially publically-owned and most of which are under some degree of public control.
The money would be used to recapitalise these banks, which means that the Spanish sovereign would be buying shares in them (in effect), not making loans. There would be no interest charge as such and it seems unlikely that the sovereign would expect to receive dividends from banks rescued in this manner. So there is no prospect of the bank rescue reducing sovereign debt until the Spanish sovereign realised any profits on the bailout, probably by selling its stake at some point in the future. It’s very similar to the bailout of UK banks.
I don’t think a bailout conducted in this manner should be regarded as increasing net sovereign debt, since it would be balanced by the shareholding in the banks. The UK has used exactly this argument to justify eliminating the debt arising from bank bailouts from its national debt.
Generally speaking, people like to leave their deposits in solvent banks, rather than have them repaid. That’s kind of the point of a bank. There seems no point in recapitalising a bank – which protects depositors and bondholders – then insisting that it eliminates its deposit base and redeems all its senior bonds.
Agreed
This debt is matched by an asset
For some reason those with debt phobia ignore that debt itself is an asset in the hands of its owner
But in the case of debt to buy a bank – now solvent – that has to be true
Fiona, these are unquestionably Spanish banks. They are the second tier — the regional savings banks — some of which are partially publically-owned and most of which are under some degree of public control.
So these banks have always been under public control in the sense of ownership of them? I had understood that they were private until they became insolvent and that the Bank of Spain took control of at least some of them because they were in trouble. Then some of them were merged to form Bankia. That is obviously not correct: so how were they constituted and how and to what extent were they under state control?
If they are private they are not spanish banks to my way of thinking: they belong to their shareholders. If they are under public control for some reason other than the crisis (ie they were organs of the state prior to any bailouts or other interventions in private companies) then they are, as you say, Spanish banks. That makes an enormous difference to what should happen and also to the nature of the problem: so I want to be clear about what is meant here.
The money would be used to recapitalise these banks, which means that the Spanish sovereign would be buying shares in them (in effect), not making loans.
Ok. If they are already partially under public control and a bail out is tantamount to buying shares, then this is nationalisation, I presume? That is what it amounts to and also what it was called when it happened to RBS.
I am not very clear what you mean when you say the Spanish government would be buying shares in them “in effect”. Are they or are they not? If the bankis are insolvent and are being nationalised why do the Spanish government have to buy shares? They are not worth anything if the bank is insolovent, and so nationalisation should not cost anything. If they are being bought then have the shares been valued by offer on the open market? If not then why is there any reason to believe they have any value at all such that the government should pay to acquire them? I can understand that you might have to pay something for the buildings and tangible assets: that is not likely to be very much in the scheme of things, however
If, on the other hand, the force of your parenthetical “in effect” does not actually mean the government is buying/nationalising the banks, then what is it doing?
There would be no interest charge as such and it seems unlikely that the sovereign would expect to receive dividends from banks rescued in this manner.
If they are being nationalised then that makes sense. They would be owned by the state and no dividend could arise. Nor could there be any interest charge because there is no loan: the asset (such as it is) is transferred in its entirety to the state by purchase at near nil valuation.
So there is no prospect of the bank rescue reducing sovereign debt
Certainly if they are being nationalised at almost no asset value.
until the Spanish sovereign realised any profits on the bailout, probably by selling its stake at some point in the future. It’s very similar to the bailout of UK banks.
Makes no sense to sell them at all. Once nationalised they should stay that way, else we just go round again, so far as I can see. I understand now that it is similar to the bail out of eg RBS, which was called nationalisation: but the state did not take control of RBS. I fear that is what is meant by “in effect”. The state pays as if it was taking ownership but it does not actually do so. Crazy.
I don’t think a bailout conducted in this manner should be regarded as increasing net sovereign debt, since it would be balanced by the shareholding in the banks. The UK has used exactly this argument to justify eliminating the debt arising from bank bailouts from its national debt.
Some of the articles I have read have stated that it increases national debt. When I conceived of this as a loan it made no sense to me: but if it is nationalisation the same applies: there is an asset to balance the liability.
However if it is not a loan, as you suggest, that is not so clear in reality. The money used to deal with the failed business is not the same as money used to acquire the asset: it is more in the nature of ongoing expenditure and that is not balanced by the asset, as the bank is insolvent in terms of its trade.
The injected capital is therefore to “rescue” those of the banks creditors who cannot be repaid. There is no matching income
Generally speaking, people like to leave their deposits in solvent banks, rather than have them repaid. That’s kind of the point of a bank. There seems no point in recapitalising a bank — which protects depositors and bondholders — then insisting that it eliminates its deposit base and redeems all its senior bonds.
Certainly people want to keep their money in a bank: and if the bank is nationalised there is no reason why they should not continue to do that. To me private small depositors and pension funds are preferred creditors, and any bail out needs to be applied to protect them. The rest have sadly lost their money, as have the shareholders. That is what happens when a firm goes bankrupt.
The deposits and pension fund money would remain in the bank and the state can use those funds in just the way they are used now: to lend out to businesses and so generate profit. Richard proposes those businesses should be green infrastructure projects and that makes sense to me.
Sorry to use this board perhaps inappropriately to try to think this through: I hope you do not mind Richard but I want to understand and currently I don’t
On haste: the dent mongers ignore the assets
They only count the liabilities
Which is why they say the owneship of nationalised banks adds to debt
It may not do so at all, net, if assets are included
But sophistication appears beyond them
Fiona,
1) Public control does not imply public ownership. Many of the cajas have local politicians on their boards who effectively control much of their activity.
You also forget that these are REGIONAL savings banks operating entirely within Spain. If they have shareholders – not all do, as some are not-for-profit organisations – those shareholders are Spanish. Even Bankia, which was created by the Spanish government by merging seven failed regional savings banks, is owned by Spanish investors; foreign ones refused to by its shares.
http://en.wikipedia.org/wiki/Savings_bank_(Spain)
2) Recapitalising a bank doesn’t necessarily involve full nationalisation. It didn’t in the case of RBS, and I doubt if the EU would want to provide Spain with enough money to nationalise all its cajas. It is much more likely that Spain would take a partial stake sufficient to make the banks solvent and no more. Whether that stake is sold at a later date is a decision for the Spanish government to make, as with any other shareholder.
3) Even if nationalisation is only partial the Spanish government is still acquiring a stake in what would then be a solvent business. What that business does with the money is not the point. The Spanish government has bought an interest in the business. That is an equity stake and it is a balance sheet asset which would balance the liability to the EU. Therefore the debt to the EU would not form part of net sovereign debt. There would be a revaluation over time as share values moved, however, which would create unrealised gains/losses for the Spanish sovereign. Those would be realised when the stake was sold – as happened with the UK government’s sale of Northern Rock.
4) Pension funds are senior bondholders. They cannot have preference over other senior bondholders, because bonds are “bearer instruments”: exactly who holds a company’s bonds at any particular time is transparent to the company. I agree that there should be depositor preference.
5) Banks don’t “lend out” money. Even cajas can lend in the absence of reserves, provided they can find settlement funding.
6) One size doesn’t fit all. Spain’s problems and the UK’s problems are not the same. Green infrastructure projects may be the right solution for the UK, but you can’t assume that the same applies in Spain. It could be argued that part of Spain’s problem is that it has had a darned sight too much infrastructure development. Recapitalising the cajas would enable them to lend to local businesses, which is their primary function.
Fiona,
1) Public control does not imply public ownership. Many of the cajas have local politicians on their boards who effectively control much of their activity.
I am aware they have politicians on their boards; and customers; and employees; and representatives of royal patronage; and other groups, because I looked at Caja Madrid, it being the largest component of bankia. It does not seem to be atypical: but I do not see any evidence of political control, in that one at least. I have seen what the papers here are saying, and it may well be that some or all of them are corrupt.They are banks, after all, so that wouldn’t exactly come as a shock. But the board composition of Caja Madrid is just what I would expect to find given the kind of institution it was, and the history.
You also forget that these are REGIONAL savings banks operating entirely within Spain.
No, I didn’t
If they have shareholders — not all do, as some are not-for-profit organisations — those shareholders are Spanish.
I think you are missing my point, perhaps.That is understandable since trading on the ambiguity is very common in this crisis. There is Spanish, as in Spanish debt: and that implies debt incurred by the Spanish people through their governrnent. There is debt which is described as Spanish (or British, or French etc) but which is in fact the composite of private and sovereign debt. It is not always easy to separate those elements, but from what I have been able to glean the private debt is far higher than the sovereign debt in many places. They are conflated in some articles and publications, and that may be for good reasons: but the inference which is readily made is that the sum total is sovereign debt. If that is what people take from it that is not neutral because it supports a particular narrative of how this has come about which is not true.
If you do not wish to be very particular about use of the word Spanish in relation to the debt then that is fine: so long as the real distinction between debt which is private; debt which used to be private; and debt which has always been sovereign, is maintained. Private debt is not Spanish debt: it is shareholder debt: or hedge fund debt; or whoever controls the institution debt. If you wish to call it spanish debt then I trust you will indulge me and use that tern to refer to it alone: we can call sovereign debt that throughout, if that would suit you: I don’t care so long as we are clear and we also know how it arose. Debt which was private and is now socialised is factually sovereign debt: but acquiring that debt because of the folly of banks or other financial institutions is not evidence of bad governance: it is evidence of bad private enterprise.
Even Bankia, which was created by the Spanish government by merging seven failed regional savings banks, is owned by Spanish investors; foreign ones refused to by its shares.
Bankia was not created by the spanish government so far as I know. Can you let me see your source for that please?
http://en.wikipedia.org/wiki/Savings_bank_(Spain)
Yes, I read it. The relevance is not obvious to me
2) Recapitalising a bank doesn’t necessarily involve full nationalisation. It didn’t in the case of RBS, and I doubt if the EU would want to provide Spain with enough money to nationalise all its cajas.
No, it doesn’t necessariy involve full nationalisation: but that is the only thing that makes sense. I fail to see why it would be expensive, for reasons already outlined. Nor do I see that the problem is confined to the former savings banks. The IMF is not so sanguine, as I read their report: they are reasonably confident about the two big banks but not so sure that the small to medium commercial banks are in the clear.
It is much more likely that Spain would take a partial stake sufficient to make the banks solvent and no more. Whether that stake is sold at a later date is a decision for the Spanish government to make, as with any other shareholder.
I agree it is much more likely: Spain is very complaisant with the views of the troika and the IMF report is wholly devoted to the preservation of the banks. But since the shares are worth nothing any injection of cash at all will necessarily transfer the ownership to the government in its entirety if the thing is done on a normal commercial basis. I figure they could buy banks requiring bail out for a 1 euro: I base that on the fact that they already did that with one of them unless memory plays me false.
3) Even if nationalisation is only partial the Spanish government is still acquiring a stake in what would then be a solvent business.
Perhaps it would be solvent: but while it is in the hands of those who got us into this mess I doubt it. Is this not the second bail out? Why should I think it will work better this time? Do you consider RBS is solvent? I don’t think it is. The IMF is not confident about that either: hence their proposal that the government should take responsibility for managing “impaired assets” either through buying them or through providing a guarantee on them. The fact is that at least some of those assets are still falling in value: and they will continue to do that while austerity is pursued IMO.
What that business does with the money is not the point.
It is certainly the point. They are bankrupt. The story we are asked to accept is that Greece must be told what to do with its money because they are not to be trusted to make those decisions: and the other countries in the Eurozone are similarly constrained for the same reason. I assume that you do not think those rules should be imposed on countries, since you do not think they should apply to banks., If that is the case then I agree. But the ECB and the IMF do not agree. I happen to think that it is more serious to undermine democracy in this way than it is to take control of a bank which is insolvent. And that is precisely because the country which has to incur the debt for the bail out is now the owner. A bank is bought and sold in the normal course. That cannot be said for countries
The Spanish government has bought an interest in the business. That is an equity stake and it is a balance sheet asset which would balance the liability to the EU.
Well it would if the asset were worth anything. I have already said that I do not think it is. However you may be right. It is easily settled. How has the price been fixed? Were the shares offered on the market to determine their current value? That is how it is usually done. If it was not done that way what was the substitute? I ask because it is very easy to pay too much for an asset: as the banks have amply demonstrated. It is what went wrong in the first place
Therefore the debt to the EU would not form part of net sovereign debt. There would be a revaluation over time as share values moved, however, which would create unrealised gains/losses for the Spanish sovereign. Those would be realised when the stake was sold — as happened with the UK government’s sale of Northern Rock.
See above. I suspect that what I have said is perhaps the reason some commentators do say it will be added to the sovereign debt. Or perhaps there are different view of the accountancy treatment. There is certainly more than one opinion on this aspect.
4) Pension funds are senior bondholders. They cannot have preference over other senior bondholders, because bonds are “bearer instruments”: exactly who holds a company’s bonds at any particular time is transparent to the company.
Where there is a will there is a way. The bank is bankrupt: therefore it is no longer a bank. I am with the Irish on this: you cannot expect to redeem your bond if the company no longer exists. So all of the bondholders and shareholders lose all of that money. But the new nationalised company can, out of the generosity of its heart and its concern for its citizens, credit an account with an equal sum in the name of the pension funds if it likes. Or replace those bonds with different ones if there is some reason for doing it that way. Being the government they can also alter the regulation of pension funds so they don’t gamble with our money in the future: or dont wipe out the return through high fees at the very least.
I agree that there should be depositor preference.
🙂
5) Banks don’t “lend out” money. Even cajas can lend in the absence of reserves, provided they can find settlement funding.
Mere use of layman’s language: nothing substantive here. I think you know what I mean
6) One size doesn’t fit all. Spain’s problems and the UK’s problems are not the same. Green infrastructure projects may be the right solution for the UK, but you can’t assume that the same applies in Spain. It could be argued that part of Spain’s problem is that it has had a darned sight too much infrastructure development. Recapitalising the cajas would enable them to lend to local businesses, which is their primary function.
Certainly. I did say lend (invest suit you better?) to businesses. I think that the idea of green projects is a good one but I did not say, nor did I mean, that was the only option. So long as there is investment which produces jobs and stuff I don’t really care if they prefer to do it differently.
But you really must stop focussing on caja’s as they used to be: they are now pretty well commercial banks, courtesy of some history and this crisis.
Recapitalising is what is likely to happen as we already agreed: but they won’t do what you suggest if that is the outcome: they will sit on the money as the UK banks do. That is presumably the rational strategy if you are a bank.
Fiona,
1) I don’t limit my remarks to Bankia or the other large cajas. Smaller banks are involved as well and I have never said they weren’t. Nor am I unaware of the gradual transformation of cajas from public banks and charitable institutions to commercial banks. You have misinterpreted what I wrote.
You have also misinterpreted my use of the term “Spanish”. I did not talk about “Spanish debt”. I talked about “Spanish” banks and I explained what I meant by that, which would be what most people mean by it. Whether the debt sitting on Spanish bank balance sheets is “public” or “private” is a tad irrelevant, to be honest, if the only strategy for dealing with it is bailout by the sovereign. It may be private debt at the moment, but it’s going to become public debt very soon.
2) Political control of regional banks is a long-standing issue in Spain – unsurprisingly, since many of them were political creations in the first place. I am astonished that you think that local politicians are appropriate people to be running banks. What an opportunity for misuse of funds and corruption! I’d suggest you research the reasons for the collapse of Caja de Ahorros del Mediterranea in 2011 – that’s the one that was sold to Banco Sabadell (not to the Spanish government, as you think) for 1 Euro.
3) The Spanish government was intimately involved in the creation of Bankia. It is not possible to create a new bank without granting a banking licence. And it provided E4.5bn funds to the new entity in the form of preference shares in the holding company BFA. Those preference shares have now been converted to voting shares, which is effectively partial nationalisation (45% stake). Regional government was also involved, because as I said before the regional governments controlled the banks that were being merged.
I’m not going to quote sources for you. There are numerous articles and papers on this. They are not difficult to find.
4) I don’t think you understand what bankruptcy is. Bankrupt companies are not worthless. They have assets, and they may even be going concerns. In the case of banks, it isn’t always easy to tell whether a bank is actually bankrupt or just short of liquidity. Banks that are technically bankrupt – for example due to a high proportion of non-performing loans – can keep going for a very long time if they are provided with liquidity: this is what Japan has done for 20 years. If a bankrupt entity ceases to trade and its assets are sold, creditors claim their share of the proceeds in preference order. It is therefore by no means certain that bondholders would be wiped in bankruptcy, as you assert: it depends how much can be raised from asset sales. The only certainty is that shareholders are wiped – which in the case of Bankia would include the Spanish sovereign.
Spain currently has a 45% stake in Bankia, which under Spanish law is a controlling interest. Bankia’s shares today were trading at 1.03, up slightly from yesterday. Bankia is certainly not worthless, therefore: its shares still have value even though the government will shortly have to take a larger stake in the business. Only if the government bought ALL the shares, or allowed Bankia to collapse, would Bankia’s shares cease to trade. Neither is the case, therefore your assertion that “the asset is worthless” is simply wrong.
As I said before , the holders of bonds are unknown to the issuing company. Given this, exactly how would the issuing company compensate pension funds but no other senior bondholders?
5) I said “what the business does with the money is not the point” because you were confusing stocks and flows, not because I think EU funding should be unconditional. It shouldn’t be, and it won’t be. What the banks will be required to do with the bailout money is clean up their balance sheets – get rid of the bad debts. This will be a condition of EU funding, and will be supervised – I think by the EBA, This means foreclosures and a big heap of litigation, so would take quite some time and involve considerable losses, which is why the bailout money will be needed. They may try to sell the loans at fire sale prices.
It would be totally inappropriate in my view for the Spanish government to expect banks to use EU-provided bailout money to invest in the Spanish economy. However, cleaning up the balance sheets should enable the banks to start lending to local businesses again – which as I said before, is their primary purpose.
Broadly speaking I agree with that
And I also agree it would be rwong to expect Spanish banks to invest to relfate the Spanish economy – that’s a separate obligation on the EU and the combined governments of Europe
Fiona,
1) I don’t limit my remarks to Bankia or the other large cajas. Smaller banks are involved as well and I have never said they weren’t. Nor am I unaware of the gradual transformation of cajas from public banks and charitable institutions to commercial banks. You have misinterpreted what I wrote.
Ok. Sorry about that
You have also misinterpreted my use of the term “Spanish”. I did not talk about “Spanish debt”. I talked about “Spanish” banks and I explained what I meant by that, which would be what most people mean by it.
You think that: I don’t. I have also explained why I don’t. We will agree to differ.
Whether the debt sitting on Spanish bank balance sheets is “public” or “private” is a tad irrelevant, to be honest, if the only strategy for dealing with it is bailout by the sovereign. It may be private debt at the moment, but it’s going to become public debt very soon.
We have already agreed that is what is going to happen. The question is whether that is what should happen
2) Political control of regional banks is a long-standing issue in Spain — unsurprisingly, since many of them were political creations in the first place. I am astonished that you think that local politicians are appropriate people to be running banks.
That is an assertion coupled with an implicit assumption. In point of fact these institutions have existed for a very long time and have been very popular with the Spanish people. There are now complaints that increasing commercialisation has moved them away from their strong social function (including a great deal of charitable work) and that inidicates that the it is the move to greater concentration on profit which is the problem. I would certainly rather have banks with a social purpose controlled by a variety of representatives, including politicians, than have them under the control of bankers. Obviously your opinion differs: but it is merely opinon and it is underpinned by assumptions I do not share
What an opportunity for misuse of funds and corruption!
That is always an opportunity with a bank: absent proper regulation it is best demonstrated by the situation of those large private banks which have had to be bailed out in this country. It is nothing to do with whether the folk in charge are politicians or bankers: the problem does not lie in that distinction. But at least politicians who behave badly in the same way as bankers do can be voted out: and that is preferable.
I’d suggest you research the reasons for the collapse of Caja de Ahorros del Mediterranea in 2011 — that’s the one that was sold to Banco Sabadell (not to the Spanish government, as you think) for 1 Euro.
I did express myself badly: my point was that the value of such banks is very low: I am aware it was bought by another bank and my post could be read to suggest the Spanish government had done it because I lazily used “they”. I apologise for that. It does not change the substantive point which is about how much one should pay for such a bank.
3) The Spanish government was intimately involved in the creation of Bankia. It is not possible to create a new bank without granting a banking licence. And it provided E4.5bn funds to the new entity in the form of preference shares in the holding company BFA. Those preference shares have now been converted to voting shares, which is effectively partial nationalisation (45% stake). Regional government was also involved, because as I said before the regional governments controlled the banks that were being merged.
So you agree it was not set up by the Spanish government. Glad we got that cleared up.
I’m not going to quote sources for you. There are numerous articles and papers on this. They are not difficult to find.
I know 🙂 I don’t much regret your decision because most of the sources you do cite are wiki, in my experience.
4) I don’t think you understand what bankruptcy is. Bankrupt companies are not worthless. They have assets, and they may even be going concerns.
I would prefer it you stopped the second guessing: particularly when you suggest things which were specifically acknowledged in my post, and which you choose to ignore.
“I can understand that you might have to pay something for the buildings and tangible assets: that is not likely to be very much in the scheme of things, however”
In the case of banks, it isn’t always easy to tell whether a bank is actually bankrupt or just short of liquidity. Banks that are technically bankrupt — for example due to a high proportion of non-performing loans — can keep going for a very long time if they are provided with liquidity: this is what Japan has done for 20 years
Of course they can. That is what this is all about. The question is whether they should be kept going, especially if doing so entails impoverishing people to get the money. Once again you avoid the substantive issue by pointing out the blindingly obvious as if it was news. I don’t find that helpful
If a bankrupt entity ceases to trade and its assets are sold, creditors claim their share of the proceeds in preference order. It is therefore by no means certain that bondholders would be wiped in bankruptcy, as you assert: it depends how much can be raised from asset sales. The only certainty is that shareholders are wiped — which in the case of Bankia would include the Spanish sovereign.
And again
Spain currently has a 45% stake in Bankia, which under Spanish law is a controlling interest. Bankia’s shares today were trading at 1.03, up slightly from yesterday. Bankia is certainly not worthless, therefore: its shares still have value even though the government will shortly have to take a larger stake in the business. Only if the government bought ALL the shares, or allowed Bankia to collapse, would Bankia’s shares cease to trade. Neither is the case, therefore your assertion that “the asset is worthless” is simply wrong.
And again
As I said before , the holders of bonds are unknown to the issuing company. Given this, exactly how would the issuing company compensate pension funds but no other senior bondholders?
You actually said the opposite, but fortunately I knew what you meant. Easily is the answer: the pension funds would show the government the bearer bonds and evidence they held them before the cut off date.
5) I said “what the business does with the money is not the point” because you were confusing stocks and flows, not because I think EU funding should be unconditional. It shouldn’t be, and it won’t be. What the banks will be required to do with the bailout money is clean up their balance sheets — get rid of the bad debts. This will be a condition of EU funding, and will be supervised — I think by the EBA, This means foreclosures and a big heap of litigation, so would take quite some time and involve considerable losses, which is why the bailout money will be needed. They may try to sell the loans at fire sale prices.
I am not confusing stocks and flows.
It would be totally inappropriate in my view for the Spanish government to expect banks to use EU-provided bailout money to invest in the Spanish economy. However, cleaning up the balance sheets should enable the banks to start lending to local businesses again — which as I said before, is their primary purpose.
Their primary purpose is to make money.
Fiona,
No, the sources I use are not “mostly wiki”, as many people could tell you. Actually I only use wiki articles if they are well supported with citations, and I would expect people to look at the citations as well since wiki can be unreliable. In this case I sent you one wiki link, but I have read far more than that. Among other things, I read BFA’s report and accounts for 2011, which devotes an entire section to explaining the process of Bankia’s creation.
You are still misreading and misinterpreting what I say. I’m puzzled as to why you are doing this, since you are clearly intelligent, and why you wish to ascribe to me opinions that you don’t know I hold. When I’ve simply passed on information, or corrected something you have said that is factually incorrect, you say you don’t find that helpful. But when you think that something is my “opinion” – even if it isn’t – you accuse me of poor research and ideological bias.
There are numerous reports that political control of regional banks in Spain is a long-standing issue: there are serious accusations of cronyism, nepotism, misuse of funds, donations to political parties in return for favours – in short, corruption. None of this is of recent origin. And none of it is “my opinion”. I “assert” nothing without researching it, and I make no “assumptions”. I merely report what I have read. As I said, this information is not difficult to find. But by all means show that there is no corruption – if you can.
Yes, politicians can be voted out. And bankers can be sacked. As the caja management generally have been or will be. But the regional politicians are still there.
CAM was certainly not a typical example of a failed bank. It was a non-profit-making organisation, not a commercial bank. Its IPO in 2008 involved non-voting shares only. The chairman of the board was personally appointed by the President of Valencia in June 2009, and the Director General was promoted from Deputy Director General in November 2010. In July 2011, when CAM was nationalised to prevent its collapse, the Bank of Spain demanded the resignation of the chairman of the board. Two days earlier the President of Valencia had resigned due to impending prosecution for money laundering, bribery, tax fraud and corruption. In September 2011, the Director General and several other directors were dismissed by the Bank of Spain for suspected accounting fraud. At least one of the directors dismissed was a personal friend of the chairman. I REALLY think you should have looked this one up.
I am not going to agree with you that “the Spanish government did not create Bankia”. Granting a banking licence, ensuring that all regulatory hurdles were cleared and providing essential capital (without which Bankia could not have traded) amounts to creating it. Yes, the actual merger itself was organised by the management of the seven banks involved. But the Spanish government facilitated it throughout with involvement from regional governments. I would (probably) exonerate the Spanish government regarding the immoral and possibly fraudulent IPO, though.
Re bankruptcy. You only mentioned fixed assets, and ignored the fact that loan books have value – even toxic loans. As do order books in bankrupt companies. Your assertion that a failing bank’s value would be “very low” is therefore wrongly founded. It depends on the asset valuation.
You did confuse stocks and flows. Equity is a stock. Income/expenditure is a flow. If the government takes an equity stake it is providing or adding to capital stock. Suggesting that there should be income to match that capital, as you did, is comparing apples and oranges. They are two completely different things.
Re bonds – what I said was “exactly who holds a company’s bonds at any particular time is transparent to the company”. Which means exactly the same as “the holders of bonds are unknown to the issuing company”, just differently worded. It does not mean the opposite.
Your final statement, while correct, does not invalidate mine. Lending to local businesses and local investment projects is the main business of cajas. Furthermore, cajas are prevented by law from paying out more to private shareholders than they contribute to the social welfare of their region. Although I said I would not provide sources, I will relent on this one: I suggest you read this http://www.ie.edu/IE/pdf/Alternatives.pdf
You will note that there are strict limits on the proportions of public and private ownership and, since 2010, opportunity for employee shareholding (e.g. via unions). You should also note that until July 2010, private “shareholders” did not have voting rights – and in some cajas they still don’t. Non-voting shareholders are more correctly regarded as creditors rather than owners.
Thanks 🙂
I am a simple soul , I don’t understand. If one considers Germany an economic success, why doesn’t all Europe model itself on Germany? Is it because Germany have a culture of organization and thrift that everyone is jealous of? Does the rest of Europe want all the benefits of econmic success but is not prepared to put in the graft?
Sorry but I think 90% of Economic theory is pure alchemy. But it keeps Academics off the dole queue I suppose.
How can everyone export at the same time which is what would be required for all to emulate Germany?
Being simple is fine
But please apply a little common sense when commenting or simple rapidly becoems stupid
And this comment is just stupid
The 90% of economists who agree with you share the trait
At least you’re in company
Glad you had a break. i was wondering how long you could keep up several blogs a day (with research) plus going to conferences.
Look forward-at some point- to hearing about the shadow banking conference in Copenhagen.
The travel starts again next week – when I’m in Helsinki for the Tax Jsutice Network’s transfer pricing conference sponsored by Finnish government
I’ve never worked harder!
Will try to cover Copenhagen when possible
Each country can export (as long as free and fair, recognising labour, environmental and social standards) if said countries stick to their individual comparative advantages….
Ah, that competitive advantage thing
Where we end up with bankers and nothing else in the UK
It works well, doesn’t it?
@ Chas.
Comparative advantage does not seem to work where there is free movement of capital. I think that has been acknowledged from the very start when the idea was proposed. I have been thinking about those ideas to try to understand them and for those who are as new to this field as I am some notions are here. If this is all wrong then I would be glad if you would explain what I have missed
http://thosebigwords.forumcommunity.net/?t=48043641&p=334662160
I think you are right
Comparative advantage works on blackboards for utilitarians (who are indifferent to income distribution and think there is no such thing as risk, only probability)
It has unfortunate consequences in real life
In connection with the question of whether these are or are not Spanish banks, Robert Peston reports today that these banks hold about 2/5 of Spanish sovereign debt. If they are spanish banks in any meaningful sense that means that Spanish sovereign debt is 2/5’s lower than currently recorded: because there is no universe in which you can owe money to yourself: only on planet economics.
To my knowledge none of the cajas is fully owned by the Spanish government – just as well, or we would be talking sovereign bailout not banking bailout. Some are partially owned by Spanish regional government.
You have rather a narrow definition of “Spanish”, if you don’t mind my saying so. You imply that only banks fully owned by the Spanish government are “Spanish” banks. On that basis there are no Spanish banks. But I don’t think the Spanish government or Spanish people would agree with your definition. To most people, if a bank operates entirely within Spain serving the Spanish people, is owned by Spanish investors and/or Spanish regional governments, and is partially or wholly controlled by Spanish regional politicians, it is Spanish in a very meaningful way. But that doesn’t mean its holdings of Spanish sovereign debt can be written off.
@ Frances Coppola
I don’t mind you saying it at all. It does not address anything I have said, however.
I don’t see how putting politicians in charge of banks will help.
Wasn’t Bankia run by local politicians?
Yes, it was
And now governance needs to be added to the equation
That’s why control is needed
I do not think that can be correct, in view of the fact that Bankia did not exist until 2010. What is the evidence for it, please
I think we’re talking at cross purposes
Fiona, the seven regional banks that were merged to create Bankia in December 2010 were controlled by local politicians. And other cajas still are controlled by local politicians. Spain does have a regional governance problem.
Agreed
Spain is not an argument for the benefits of localisation right now
Caja madrid was not controlled by local politicians, nor were any of the others I have looked at: they were controlled by a mix of people on their boards representing a variety of interests: just as one would expect given the history of these institutions.
It is certainly true that the move to commercial values has not been helpful and many have commented on, and complained about, that shift. It is also true that the particular pattern of regional governance in Spain has had an impact on the decisions taken: there is a long paper from the Joseph Rowntree Trust about regionalism in Spain and France which is instructive in that regard. Much of what has happened is afffected by that history too, and to the extent that is true it is certainly not a good argument for localisation at present. But it does not arise because of who controls the banks: other forces are in play, as they always are
Guardian today has a piece on the incestuous relationship between Spanish political parties and caja boards. http://www.guardian.co.uk/world/2012/jun/08/spain-savings-banks-corruption
Yes, I read it. It states things which suit the agenda but it does not show they are true.
For example: Modesto Crespo was the chair of CAM. He is not a politician: he is a corrupt businessman.
http://www.fundacionfrax.org/?p=1069&lang=en
Roberto Lopez Abad, also mentioned, is an economist
While it may be true that such people have close links with politicians that is no surprise given what we see at the Leveson enquiry..
“money is costless to create..” Or as Milton Friedman put it, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.” That’s from Chapter 3 of his book, “A Program for Monetary Stability”.