So the Spanish do need some money after all

 

       For many days the markets have known that Spain needs a loan to help bail out her banks. It makes the decision of Spanish Ministers to spend last week denying it all the more bizarre. It is yet another example of the poor EU/member states spin in handling this rolling crisis.

      Spain apparently will receive money for her banks on softer terms than Ireland, yet Ireland also needed to borrow money because of the state of her banking system.  It’s all borrowed money, reflecting past government mistakes in handling state finances. There will be resentment about the different standards applied and the difffering demands.

       A better answer than  more state debts and more collective loans would be to sort out the poor state of some Spanish banks. Future regulatory standards are to be based on living wills. That means selling off the bits of the banks that work and closing down the bits that are overburdened with debt and cannot trade successfully in the future. Those who have financed the banks take the hit. Why don’t they start it now? If it makes sense for a future crisis to do that, why not try it out in the current large banking crisis enveloping Europe today?

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46 Comments

  1. Posted June 10, 2012 at 7:33 am | Permalink

    JR: “For many days the markets have known that Spain needs a loan to help bail out her banks.”

    Four years down the road from the first credit crunch, on the threshold of the next credit crunch, exactly what did bailing out the banks achieve, except rewarding the abysmal failure of the top banking executives, and putting the insolvency of the European States – and the US into question.

    To put it another way, after four years of bailouts, are the debts smaller, or do we seem to be finding more greater debt that ‘suddenly’ is a threat to this bank or that bank?

  2. Posted June 10, 2012 at 7:38 am | Permalink

    Never believe anything until it’s officially denied.

    • Posted June 10, 2012 at 8:41 am | Permalink

      Then it’s definitely going to happen. In the 90’s Russia changed their currency in the sense that different notes where issued. The old ones becoming worthless on a certain date. The currency change was denied and then changed soon after with a shortage of the new notes and dollars all sold out. Your money effectively stolen. This leads to live for the day attitude and better to drink the money than loose it.

  3. Posted June 10, 2012 at 7:42 am | Permalink

    One only has to look back to the 1930’s to see the consequences of being on the gold standard
    The euro is working in a similar way being a supera national currency that countries can not control
    The hard up states of europe need the flexibility to float their currencies so they can reach a level that will make their economies competitive again. These bail outs merely put off the day of reckoning and do little to encourage financial responsibly.
    Let these banks go bust that way future share holders will be encouraged to demand a more prudent operation of banks .
    If you visit a casino, place large bets reap huge rewards when the game goes your way but then can winge to the tax payer when loses mount up, that’s not going encourage prudence.
    Depositors,share holders are adults who should take a care of their cash.

    • Posted June 10, 2012 at 8:37 am | Permalink

      “consequences of being on the gold standard”

      This farce would not have been possible on the gold standard. Countries, and banks, would have had to live within their means.

    • Posted June 10, 2012 at 9:13 am | Permalink

      I heard on the news this morning that the Spanish bailout is not a bailout. I’m confused. Is it or isn’t it?

      Reply: Spain says it’s a bail out of the banks, but as bank and state finances are so entwined many of us think it is simply a bail out like Ireland’s.

      • Posted June 10, 2012 at 10:12 am | Permalink

        JR: “many of us think it is simply a bail out like Ireland’s.”

        It differs in one big respect from the Irish bailout, Ireland had onourous conditions imposed on them to recieve the bailout (read: more pretend Euros) Spain not so.

        Ireland doesn’t see why they should be treated differently to Spain, this is where the dog fight gets nasty.

        • Posted June 11, 2012 at 5:35 am | Permalink

          Funny that the Irish had a chance just last week to protest and they totally fluffed it!

          So it is coincidence, that less than a week after the Irish referendum the Spanish deal is done?

      • Posted June 10, 2012 at 8:53 pm | Permalink

        APL

        “This is where the dog fight gets nasty”

        Indeed, we will start to see National concerns being put above European ones, then protectionism, then …………..

        Indeed it could get very, very nasty as people start to lose faith completely with their own Governments, and start to run with the rather more extreem organisations that promise nationalism.

        Eventually it could be country against country within the EU.

        • Posted June 10, 2012 at 10:00 pm | Permalink

          Alan Jutson: “Eventually it could be country against country within the EU.”

          It always was country against country in the EU, there used to be enough money flushing around to buy off the weaker whingers and enough that the stronger countries didn’t mind too much.

          With the collapse in credit, everything changes.

          • Posted June 11, 2012 at 7:54 am | Permalink

            APL

            “It always has been Country against Country……”

            Agreed.

            But now we are begining to see the real people, the masses getting involved, and civil unrest is rising.

            Civil unrest, no money, no jobs, little hope, and politicians seen spending money like its going out of fashion, that is a potent cocktail.

    • Posted June 10, 2012 at 10:31 am | Permalink

      This banking crisis is down to reckless behaviour encouraged by governments giving the impression that institutions were ‘too big to fail’ and would get bailouts. This bailout for Spanish banks (hilariously not the Spanish state……I’m sure that Ireland will be happy with that distinction) is also ‘financed’ through the EFSF based in Luxembourg……ho hum

      Zorro

  4. Posted June 10, 2012 at 8:38 am | Permalink

    You overlook the fact that this is all part of the creation of a country called Europe and so the politicians and Eurocrats will do what is necessary to fulfil their goal in their own way and in their own time. I read in today’s Sunday Times that the Spanish banks in crisis are those who were controlled or influenced by local politicians and there may even have been corruption with yet more scandals to be uncovered.

    • Posted June 10, 2012 at 3:36 pm | Permalink

      Well said Brian!

      We need to see the bigger picture. Makes me fume!

      Tad

  5. Posted June 10, 2012 at 8:53 am | Permalink

    I said recently that the EU does not have a federal treasury with ONE federal debt management office, issuing the ONE federal currency; the EURO. The UK; USA and the likes do have. Hence the Treasury is the spender of first resort and the central bank is the lender of last resort. Primary requirements of a fiat monetary system, that has a goal of operating its economy at full throttle as often as possible. The latter I understand is not possible with a commodity based monetary system; like gold.

    Anyway; see the following link and the few after it ( next / back titles at top of article). You will get to the “three perspectives” in the latest one, see where you think we are now.

    Caution: this article contains flash photography but his family has been told. (You have to add those phrases nowadays; along with this site plants cookies in your computer, so you can read what you wrote before it is moderated by JR). http://www.thomaspalley.com/?p=185 . These articles would be considered by the BBC to be “right wing”. 😉 .

  6. Posted June 10, 2012 at 9:15 am | Permalink

    Of course neither Eire not Spain are in financial trouble because of pre-recession government policy, unless you count membership of the Euro…

    Both countries banking systems are in trouble because of private sector bubbles that have now burst.

    • Posted June 10, 2012 at 10:14 am | Permalink

      You can’t describe banks as being in the private sector when they get public money bailouts. There is no real free market at all in the financial sector. If there was banks that lent money recklessly would be quickly faced with a run and going out of business. With government guarantees on bank accounts and bailouts on demand the banks can chase profit without regard to their depositors. The system that has operated in all European states and the US especially is crony capitalism that is morphing into fascism as the elites get desperate and start to contemplate mobs with pitch forks.

      • Posted June 10, 2012 at 11:07 am | Permalink

        The private sector bubble in Spain was, like in the UK & US, in housing.

        The banks may have facilitated and profited from it, but it wasn’t a banking bubble.

        Thus, whatever the state of the banks, it was ordinary people (and businesses) borrowing, not the state.

        • Posted June 11, 2012 at 5:50 am | Permalink

          Thus, whatever the state of the banks, it was ordinary people (and businesses) borrowing, not the

          Perhaps Spain also suffered from unrealistically low interest rates like the UK and US. These are due to the banks doing what the State wants; the public are simply swept along in the dream.

          Many in the UK have run up huge debts, and it’s certainly their choice to have done so. However, they were encouraged to do so (and cheered along) by the Government. Is the Spanish housing bubble that different?

      • Posted June 10, 2012 at 12:11 pm | Permalink

        It would have been interesting to see what would have happened if the banking system was allowed to collapse with no money in the cash machines no wages paid, savings lost and so on. Let might make right. Or was it consult your financial advisor? A fantasy that many fantasists could not fantasise.

        • Posted June 10, 2012 at 10:03 pm | Permalink

          Bazman: “It would have been interesting to see what would have happened if the banking system was allowed to collapse .. ”

          Not long now,o before that scenario will be of more than academic interest to you.

    • Posted June 10, 2012 at 3:54 pm | Permalink

      Like all the Brits who bought properties in Spain, and priced locals out of the market?

      Just wondering if the same could now happen here?

      There are plenty of people from other countries looking to invest in British property.

      Tad

  7. Posted June 10, 2012 at 9:50 am | Permalink

    Indeed Quelle surprise!

    I see that John Bercow is calling me and countless others “a bigot and a snob”.

    “My critics and bigot and snobs”, says Bercow in the Times today. What group does he think I am bigoted against – short, self interested, career politicians perhaps?

    Just because I, like most sensible people, think he is totally unsuitable, in so very many ways, (with or without his self publicist wife) to uphold the “dignity”(such as remains) of the House of Commons.

    Is it not time for him to take his huge, unwarranted, pension and go preferably taking his wife with him.

    • Posted June 10, 2012 at 4:03 pm | Permalink

      Indeed you are a man after my own heart! I love your posts. May you keep talking sense. It’s only by talking rational common sense, that we’re ever going to effect change.

      I’m surprised Burcow didn’t defect to Labour. It seems he’s more suited to the left.

      Tad

    • Posted June 10, 2012 at 5:11 pm | Permalink

      Noel Coward was hosting a cocktail party at his house and all the Good and Great were telling anecdotes.
      “Well,” said the Admiral, “I was just coming off the boat and this stupid customs officer questioned the bottle of gin I was holding. The fool didn’t know who I was.”
      Noel Coward: “And who were you?”

  8. Posted June 10, 2012 at 11:01 am | Permalink

    Proverbs 21:6

    • Posted June 11, 2012 at 2:15 pm | Permalink

      “Getting treasures by a lying tongue is a fleeting vapour for those who seek death.”

  9. Posted June 10, 2012 at 11:38 am | Permalink

    The EU plan of champagne is for Ireland to catch up with Alice in Spain by giving back their (Ireland’s that is) bail out money, which Brussels lend to Ireland’s banks, which they (Ireland’s banks) then use to finance the Irish Government’s give back. You know it makes sense (not). Scraping the barrel a bit here so one country can save face (they hope). It may do the opposite. As I understand it the Spanish Government is guaranteeing all this so I for one haven’t grasped cui exactly bono. BTW, does Italy have any banks that need rescuing–one loses track. Solve their problems just like that as well except that there is no more money. And even more BTW, when the UK’s debt level is criticised (rightly) why do we not seem to be credited with our having financed our own banks early on in this mess and without any bailout best I remember. Maybe those who consider us a (safe) haven do realise this.

  10. Posted June 10, 2012 at 12:34 pm | Permalink

    It’s a ‘bailout sans troika’. Let’s see if the Greeks get such leniency after their election. I am betting they will not.

    • Posted June 11, 2012 at 2:16 pm | Permalink

      Greece won’t get anything if the new government rejects austerity and the bailout.

      • Posted June 11, 2012 at 3:33 pm | Permalink

        Oh yes they would. They would get the chance to leave the Euro and be free, and to convert their Euro debt to new drachmas. It would be better than a 75% haircut for private bondholders and international institutions being treated as preferential creditors. Above, they would be able get some growth in their economy, which would help them and all the rest of us.

  11. Posted June 10, 2012 at 1:44 pm | Permalink

    Bercow could replace Ashton & restore dignity to the vertically challenged!

    As the old Castillian saying goes: Alles fur Deutschland!

  12. Posted June 10, 2012 at 2:45 pm | Permalink

    But this is not a bail-out, on the contrary it’s a “not-a-bail-out”.

    Hilarious.

    From euobserver:

    http://euobserver.com/19/116556

    an article headlined:

    “Eurozone agrees up to €100bn bail-out for Spain’s banks”

    which ends with:

    “”This is not a bail-out,” de Guindos stressed.”

    Reminds me of that constitution which was “not-a-constitution”.

  13. Posted June 10, 2012 at 3:20 pm | Permalink

    Speaking of the Irish bailout isn’t it time the Chancellor gave an update? I remember him boasting at the time we’d make so many billions of profit over a few years.

    How’s it working out? At a guess I’d hazard like everything else he’s turned his hand to.

  14. Posted June 10, 2012 at 3:28 pm | Permalink

    John,
    While you are on the subject of banks needing bailing out, who is going to tackle the £40 billion of undeclared losses in British banks, how are they going to deal with it and where will the money come from?

    • Posted June 10, 2012 at 10:35 pm | Permalink

      I guess from your lack of response that you have no more idea than me.

  15. Posted June 10, 2012 at 5:08 pm | Permalink

    And how much is dear old GB up for?

    The IMF is there ready with its purse wide open for contributions!

  16. Posted June 10, 2012 at 5:26 pm | Permalink

    Newly created debt, financing inherited debt, sounds like a recipe for disaster. Just when, amongst the world leaders, is anyone going to see the truth? Famously, Labour PM James Callaghan told his people that you can’t borrow your way out of a recession.
    He said…….
    “ We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. . . ”
    He was right but why do successive Governments still follow the path he was so against?
    What is wrong with Downing Street? Are they really so weak, too naive, woefully inexperienced and bereft of the relevant knowledge that they do exactly what the bankers tell them to do? I do hope the Conservative backbenchers can kick some sense into them before the Tories are annihilated in 2015. Even after 13 years of Labour Armageddon, the latest polls suggest that they are now preferred by a mile. Dave really does not get it. He is doing it ALL wrong and it is down to you MPs to put him in the picture and make him see sense, before you all resign en masse.

  17. Posted June 10, 2012 at 8:39 pm | Permalink

    In reply to your last paragraph John could we close down Ulster Bank. Sir Phillip Hammond RBS Chairman gave a frank interview to the FT this weekend about the £12 billion ‘impairment’ and the £6 billion new capital injected into Ulster Bank.

    We have already discussed on this blog that Ulster Bank losses are rising year on year 25% currently losing £1 billion and projected to rise to £1.2 billion this year. This is effectively a fiscal transfer to the Irish where they retain the assets and the UK taxpayer gets the losses.

    It is really time for RBS to ‘man-up’ and take some decisive action to stop the contagion from Ulster Bank that is infecting the remainder of the RBS operation. It is patiently obvious that the current Ulster Bank does not have the capacity to handle a toxic property portfolio. This situation is fast deteriorating and pending Irish leglislation will accelerate Ulster Bank woes.

    • Posted June 11, 2012 at 6:36 am | Permalink

      Eyewatering – if their portfolio is based on Irish property then what are they waiting for? They MUST close this down and stop the rot now.

    • Posted June 11, 2012 at 4:54 pm | Permalink

      Property prices in Ulster have halved and more since the peak. The have much less distance to fall than properties elsewhere in the UK. Ulster Bank is probably much closer to resolution than the rest of RBS for that reason. In fact, if the Irish could be persuaded to support Fermanagh shale gas, they might have an ideal opportunity to lend to burgeoning and successful new businesses that might even support some bounce in property values.

  18. Posted June 11, 2012 at 2:12 am | Permalink

    It’s high time to let bad banks crash and burn. Send in an administrator when requested. Let the Spanish legislate to ensure that shareholders bare the brunt of losses, then depositors and creditors, without taxpayer involvement. We should be reading up on what happened to Iceland and learning from it.

    And it’s not just Spanish banks. Spain, Italy and France all have a number of zombie banks stopping the lending and inter-bank markets working properly. There could be as many as 40 banks involved.

    • Posted June 11, 2012 at 3:09 pm | Permalink

      So Spain are to be provided with € 100 billion of EU funds to guarantee debts of their banks. A whopping 22% of this is to come from Italy, whose total state debt will reach 137% of GDP by 2014. Guess what that will do to Italy’s credit rating. The Gaderene swine are still rushing headlong towards the cliff edge.

      For goodness sake, let private debts remain private and let failed banks fail. Learn from Iceland.

  19. Posted June 11, 2012 at 6:33 am | Permalink

    I hear figures of £100 Bn Euros floated around. International markets lend the banks this and what next? If they have run out of money during the 4 years of the recovery, how on earth are they going to pay this back, under what terms and how long a period?

    Presumably then they have large areas of their banking sector with Northern Rock type toxic parts which are dragging everything else down which as you say should be split out and shut down.

    The more I hear about this the more fearful I am that the inevitable is just being delayed by borrowing more which will lead eventually to the same conclusion.

    It seems that we minions have to be a lot more creative with ways to make and save money these days – why can’t governments and banks do the same?

    What did some famous poet say about doing the same things time and time again that fail?

  20. Posted June 11, 2012 at 9:23 am | Permalink

    As pointed out all that has been offered is a temporary respite with Germany insisting that Spain remains responsible for all its debt.

    It’s hardly earth-shattering but world markets have risen on the news. I wonder how long it will take for them to realise that this is not a fix, only yet more sticking plaster.

  21. Posted June 11, 2012 at 11:18 am | Permalink

    In any business you have to work on real values but the banks and the politicians just do not have the balls to suffer the write offs which are esssential. Until that hurdle is cleared we will never see growth. So much for QE – it would make you laugh – how can our politicians be so inept unless of course they are looking after No1. Good pensions,expersnes etc etc. So backbenchers, either help to sort this mess my making it clear what needs to be done or consider a career change come 2015. Dont say you were not warned!!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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