Spanish Rescue Package Will Further Bleed Taxpayers
Spain’s hapless tax payers, already bleeding from rising unemployment and falling economic growth, had another burden thrust upon them today when their government acquiesced under duress to a €100 billion rescue package for Spanish banks.The money will come from funds set up by its Eurozone partners and the European Central Bank (ECB) in exchange for first preference for repayment. In case of default, private lenders would have to negotiate haircuts while the ECB and government lenders, such as Germany, would get full repayment plus interest.
The package looks like a move in German Chancellor Angela Merkel’s struggle to prevent the euro crisis from becoming her undoing in the October 2013 federal elections. Instead, she may have tied another knot hard to unravel without breaking up the Eurozone.
The precise figures will emerge after June 21 awaiting a new report on Spain’s needs but taxpayers will get no joy because the package includes nothing to foster jobs, speed growth or soften austerity. Spain will also have to accept some form of outside supervision of its banks.
Lenders are the real winners here judging from earlier bailouts for Greece, which should return nearly 12 percent to the ECB (it lends to Germany at less than one percent). The costs will not be as high for Spain but much depends on other measures missing so far to boost its economy. The irony is that the Spanish government has about the half the indebtedness of Greece and does not deserve punishment for poor governance or the severe pressures put on it to impose austerity.
Madrid resisted a rescue package for months to prevent a run on banks caused by loss of confidence of ordinary Spaniards in both the government and their banking system. That would amount to an economic and political disaster, starting from a situation of negative growth and youth unemployment of over 50 percent.
The Spanish government was made to swallow the rescue package to build a firewall around the entire European banking system, in case Greece defaults or leaves the Eurozone after elections on June 17. There is a slim possibility of that if the left wing Syriza party gains control because it is campaigning on a promise of repudiating earlier bail outs of about €170 billion.
Syriza is riding on outrage against the awful austerity imposed on the people. Since Greece’s debts are caused by government, they can be repaid only through lower public spending and higher tax revenues. In contrast, private bank debt can often be repaid through better risk management, services, productivity and innovation.
Most of Spain’s economic problems stem from excessive private indebtedness for consumption and housing. That debt was fuelled by German, French, British and Dutch banks, which lent recklessly because they could borrow cheaply for years. Spain could have roughed it out but German vacillation caused its government borrowing costs to rise beyond 6.5 percent causing over €110 billion to flee in recent weeks (about 9% of GDP).
The private debt bubble started bursting after the 2008 housing market collapse begun in the US. But Europe dithered for nearly two years because Berlin feared having to write off the bad debts. It spent that time in devising ways to make the host governments of ailing banks responsible for repayment so that the private debt defaults would never reach the German banks that provided many of the original funds to the now endangered lenders.
Berlin is using multilateral mechanisms to lend to the host governments with first preference for repayment in full. This shift of responsibility for repayment away from banks to the government may have worked if the funds provided were cheap enough but the negative turn in Greek politics after the May elections raised the stakes immeasurably. The risk now is of Greek repudiation of the government to government bailout, a debt default and exit from the Eurozone. That could cause disintegration of the Eurozone and perhaps the European Union, especially if it destabilizes the banking systems of Spain, Italy, France and, eventually, Germany.
Therefore, the rush to a Spanish bank rescue package designed like a firewall. But it is being botched by unacceptably high repayment costs to Spanish taxpayers to avoid costs on German taxpayers. This is a key reason for the anger of Syriza, Greece’s new political force, and the troubled governments of Spain, Italy and Portugal. And it may yet cost Merkel her job next year.