Monday, 27 June 2011

What to do about Spain's banks?

SPAIN (El Pais) A significant part of the blame for Spain's current borrowing problems, and the resultant delay to economic recovery, lies with the country's financial system. Investors are punishing Spain for the uncontrolled lending that fed a decade-long property boom. Banks and savings banks have around 150 billion euros invested in potentially problematic property assets. To give an idea of the scale of the problem, that figure is equal to around 15 percent of GDP. And unlike other sectors with problems, when the financial sector gets into trouble, it immediately affects the rest of the economy.>>>
Ever since 2008, when the crisis kicked in, there have been calls for the banks to shoulder a greater part of the burden for their role in getting us into this mess - not that our government or opposition have paid much attention. But the 15-M grass-roots democracy movement that emerged in the run-up to last month's regional and municipal elections, has kept the issue alive, pointing out the banks' involvement in feeding the boom, of costing the economy billions while paying itself huge bonuses, and by preventing economic recovery by turning off the credit tap to small and medium-sized businesses. A recent report by the INE state statistics institute shows that a quarter of non-financial-sector companies that applied for loans in 2010 were turned down.

So far, Spain has spent the equivalent of around 2.6 percent of GDP on rescuing the country's banks, compared to 3.4 percent in the United States, 6 percent in the United Kingdom, and nearly 30 percent in Ireland.

The 15-M movement has drawn up a series of proposals aimed at imposing stricter controls on the banks: no more bailouts; the nationalization of banks in trouble; that they return the tax-payers' money they have received; higher taxes; and sanctions for poor practice.

EL PAÍS talked to several economists from across the political spectrum about the 15-M movement's proposals. They all agreed that reforms to the financial system are needed, but said that it is important to distinguish between savings banks, known as cajas, and banks, adding that greater supervision is required.
But they all reject the idea of nationalizing banks, and are divided over the issue of letting banks fail. In general, they see the 15-M ideas as naïve, and in some cases, populist.

"More than a hundred banks have gone to the wall in the United States, with no major repercussions, but they were small banks. Big banks are different - they keep the wheels of the economy rolling," says Jordi Fabregat, who teaches finance at the ESADE business school.

Aside from Caja Castilla-La Mancha, and Cajasur, Spain has yet to nationalize any banks, as the British government has done. But the sector has received significant amounts of public money, notably through the FROB restructuring fund aimed at persuading the cajas to merge.

So far, the cajas have received around 10 billion euros from the FROB. What's more, the government may still take over cajas that have failed to attract new investment to meet core capital requirements.
"We already have publicly owned banks in Spain - they are called cajas. The financial system's problems didn't come from Santander or BBVA, but from the cajas. Any publicly owned bank will always end up being run according to political interests and that ends in disaster," says Jesús Fernández-Villaverde, a lecturer at the University of Pennsylvania.

Regarding the proposal that the banks return the money that has been lent to them, the experts point out that this is what is happening: they are paying 7.75 percent interest on their loans.

On the issue of making the banks bear a heavier tax burden, the experts say that this makes little sense, given that the banks are not entirely to blame for the crisis, and that higher tax would limit the banks' ability to lend even further.

Some economists feel that while banks share some of the blame for the current crisis, they are being unfairly targeted.

"The property bubble in Spain was caused by the banks for lending money at low rates, but the people who borrowed money, often to speculate, are as responsible, as is the Bank of Spain for not cracking down on the lending, while the regional governments are to blame for rezoning land to be built on," says Rafael Pampillón of the IE Business School.

"To survive, the financial institutions have to make money. We can tax them all we want, but any increase in their costs will be reflected in the prices of their products and services," says Jordi Fabregat, adding: "They operate on very narrow margins. This means that if we impose new taxes on them, they will earn less money, and therefore, there will be less money available to lend."

No comments: