Jun 4, 2012
The Spanish government recently took control of Bankia, the country’s fourth largest bank, giving it 5.6 billion dollars to keep it out of bankruptcy. But two weeks later it had to add another 23.5 billion dollars to help this bank.
In fact, the entire Spanish banking system is threatened with bankruptcy – the result of Spanish capital invested in real estate speculation from 1990 into the 2000s, until the crash of 2007. The total amount of “problematic” investments added up to 228 billion dollars at the end of 2011. The investments consisted of loans that could not be paid back, seized land and buildings that can’t be sold. In other words, “investments” worth nothing.
With the worsening economy, the situation of the banks has worsened. Unemployment has skyrocketed and the standard of living of much of the population has collapsed due to the government’s austerity plans. Borrowers – whether individual or business – are in a continually worsening situation. So the banks were pulled down as well. These banks borrowed billions of euros at very low interest rates from the European Central Bank. But the loans weren’t enough to improve their situation. On May 17th, Moody’s lowered the credit rating on the bonds of sixteen Spanish banks.
The Spanish government has repeatedly told the financial markets that it won’t have to appeal to the European Union or the International Monetary Fund to save its banks. It reiterated its commitment to cut its budget deficit and lower the national debt. It said it is determined to make the Spanish population pay the costs of this reduction. Yet the interest charged for 10-year government bonds rose to 6% on the secondary market. Bankers and financial companies that live off the indebtedness of states doubt the ability of the Spanish state to avoid the failure of its banking system. Spain is already sending support to regional governments that have large budget deficits. But by requiring Spain to pay a very high interest rate on its loans, the financiers increase Spanish debt, compromising Spain’s ability to avoid the collapse of its banking system.
The structures the European Union painfully put in place to come to the aid of troubled states in the euro zone – already used to aid Greece, Portugal and Ireland – now don’t have enough money left to prop up a collapsing Spanish banking sector.
For several billion dollars more that the financial sector plans to squeeze out of the Spanish government, that sector today risks precipitating a greater financial crisis impacting most of Europe.
This is what’s called playing with fire.