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Where Does It End? Bailing Out Spanish Banks Hurts Britain and the Rest of the West

June 13, 2012

By Nicole Gelinas

PRINTER FRIENDLY

Spain’s prime minister, Mariano Rajoy, has succumbed to worldwide pressure and taken on yet more public debt to bail out his banks.

Rajoy spun the decision as a ’victory’ for Spain. But it’s appeasement – and appeasing the eurocrats who have taken over financial markets harms not only Spain, but Britain, too.

Conventional wisdom holds that Spain must rescue its banks from its tens of billions of pounds’ worth of bad property loans. If Spanish banks failed, the thinking goes, Spain itself would be plunged into depression. The euro itself would face heightened risk of breakup, imperiling the rest of Europe’s economy, too.

Sounds terrible, but guess what? Spain is already in a depression. There’s not much else you can say about a country with a 23.8 percent unemployment rate, three times Britain’s.

Saving Spain’s banks won’t fix that situation. Even if the banks have some money to lend, they won’t lend it to people and small businesses who labour under the weight of a depressed economy. The banks will instead lend any extra cash right back to the government, which, in turn, will lend it right back to the banks. Hardly a sustainable solution.

As for the euro, the biggest risk it faces is that German and French taxpayers will no longer be willing or able to prop it up – and that probability grows as the European economy shrinks and as countries sinking deeper into debt require more bailouts, not less.

The best thing for Spain – and for Europe – is to free itself from some of its oppressive debt.

And luckily for Spain, its debt problem isn’t that the government itself borrowed far more than it could ever afford to repay, as is the case in Greece. Rather, it was Spain’s banks that borrowed far more than they could ever afford to repay, at least not without government help.

The solution, then, should be simple: let the investors who freely lent Spain all that money suffer the predictable consequences of that recklessness.

Spain, with European help, should restructure its banking industry so that bank bondholders and other bank creditors take their losses. Since Spain’s bubble-era bank managers and owners botched the job, new managers and owners should take over. Spain should use Europe’s money to protect only small depositors in its banks – nobody else.

Such a step would strengthen Spain’s economy. Banks, freed of their bubble-era mistakes, could lend again. The euro, too, would be stronger, as a recovering Spanish economy could repay national debt.

To see how this is work, just look at the difference between Ireland and Iceland.

After 2008, Iceland, under pressure from the rest of Europe, used its shriveling national resources to bail out its bank investors. Ireland now has 14.5 percent unemployment. Iceland, by contrast, chose to let the sophisticated investors in its banks take their losses.

Iceland’s unemployment rate? 6.8 percent, less than half that of Ireland.

Of course, leave it to Europe to take something that’s easy and made it hard – which the Continent has duly done.

First, elected officials from German chancellor Angela Merkel to former French president Nicolas Sarkozy long pressured the European Central Bank to pump cash into Spanish banks, delaying the inevitable reckoning and putting the ECB at risk of loss, too.

Second, Spain allowed its bank managers to confuse small depositors into buying stocks and bonds in banks – leaving them vulnerable, as well.

These mistakes make Spain’s wise course tougher – but not impossible.

The ECB, like any sophisticated institution, should suffer the consequences of having thrown good money after bad. If Germany wants to bail someone out, it can rescue the ECB – and the political blowback will teach Merkel not to do it again.

The same is true of Spain’s mom-and-pop bank investors. Yes, they’re sympathetic victims. But it’s better for people who had some cash to invest to lose money on a bad bet, rather than to throw more people with no cash to spare onto the unemployment lines through no fault of their own.

The course that Europe and Spain are choosing instead offers only more desperation and desolation – and the poison will spread over the English channel.

Consider why the West, including Britain, is in such a mess: too much debt, most of it taken on through a dysfunctional financial system.

Why did investors lend so much money so cheaply during the boom not only to European banks but to British banks, too, which, in turn, used much of it to pump up property markets, making life for middle-class people unaffordable?

Investors figured that in a pinch, the banks would get bailed out.

The investors were right; they don’t make the big bucks for nothing.

British taxpayers still own huge chunks of Royal Bank of Scotland and Lloyds. And though David Cameron and George Osborne have been careful to say that British taxpayer funds won’t support the latest Spanish bailout, a Downing Street spokesperson did say that the Spanish announcement is ’welcome’.

By supporting the Spanish bank bailout, even tacitly, Britain is sending an unmistakable signal to investors: the preferred fix to financial crisis is a bailout. It’s just that each country should be responsible for their own banks.

Yet Britain can never recover from the current crisis until it weans itself off of its bloated financial industry and its dependence on debt.

That won’t happen under this global "recovery" strategy. For as long as Britain tolerates Western bank bailouts, banks will continue to attract more than their fair share of funding. Banks, then, will continue to have the cash to pay ridiculous salaries and bonuses. That easy cash will still lure people who should be doing something – anything! – else that would be more useful to Britain’s economy.

This dysfunctional system harms recovery. It also harms society, by fraying support for the free-market system.

The risk to Britain’s taxpayers, too, is palpable.

Spain’s banks owe global creditors about 48 percent of the nation’s GDP. Britain’s banks, by contrast, owe creditors more than two and a half times the nation’s GDP, according to Bank for International Settlements and Organisation for Economic Cooperation and Development statistics.

The question is not whether Britain would bail out its banks again, but whether it even could. Next time, it could be Britain with sustained double-digit unemployment – and the rest of the West will be too weak to help. Sending a clear signal now – that governments, as opposed to private investors, are not fully responsible for bank loses – would even be worth British losses on some of the United Kingdom’s $53 billion exposure to Spain’s banks and other borrowers. Otherwise, where does it end?

David Cameron and George Osborne can talk austerity all they like. But for as long as they encourage their fellow nations to blow money on a luxury they can’t afford – bailouts of bank creditors – it’s just talk, as they continue to court the same fate for British taxpayers.

Original Source: http://www.dailymail.co.uk/debate/article-2158624/Where-does-end-Bailing-Spanish-banks-hurts-Britain-rest-West.html?ito=feeds-newsxml

 

 
 
 

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