The Pain in Spain
After a couple of years hanging on the edge of a cliff, Spain has finally succumbed to accepting a bailout of €100bn to support its ailing banks. The writing has been on the wall for Spain ever since Portugal was forced to surrender to its creditors. For all that time, Spain has been the ‘S’ in PIGS – the European countries most susceptible to economic collapse. P (Portugal), I (Ireland) and G (Greece) are already down; and now at last it is Spain’s turn, with Italy not far behind. Like Portugal, Spain has resisted accepting a formal bailout, which, however, in the end proved necessary to prevent a sudden drastic collapse of its economy precipitated by the bankruptcy of its major banks. To accept a bailout involves humiliatingly handing over to your creditors control over all financial decisions, a control that they exercise, naturally, entirely for their own benefit and not for the benefit of the debtor.
Anybody becoming bankrupt whose affairs are taken over by an insolvency practitioner for the benefit of the bankrupt’s creditors will be treated in a similar way: everything he owns and everything he earns will be taken for the purpose of paying off the creditors as much as possible, while the debtor is left with a bare minimum on which to survive. In the case of international sovereign insolvencies, however, there is far less concern to leave the afflicted countries with even this bare minimum. The situation in Greece, for instance, the first eurozone country to be put effectively into insolvent administration, is so dire that its citizens are being deprived of essential medications. The Sunday Times of 17 June 2012 in an editorial (‘Greece puts Europe on the brink’) described Greece’s present plight in the following terms:
” Now parts of Greece are borderline Third World, with soup kitchens, food and fuel shortages, pharmacists running out of drugs, wages and salaries going unpaid and a morbid sense of lawlessness and social breakdown. Athens, the cradle of civilisation, is dangerously close to the collapse of civic society.”
At one hospital, St Olga’s in Athens, it is reported in the same newspaper (‘Abandon hope all ye who €xit here’), painkillers had run out because Greece can no longer pay for them, and patients recovering from major surgery were screaming in agony as a result. Yet the austerity programme, initiated under Greece’s social-democratic Pasok government and continued ever since the latter collapsed last year, has not improved matters in the slightest. The crisis juggernaut has rolled on relentlessly, mowing down the lives and well-being of millions in its wake. There was a 40% rise in suicides in Greece in the first 6 months of last year.
Neither are Portugal or Ireland showing any signs of recovery, although their people’s standard of living has drastically plunged.
It is therefore entirely understandable that Spain fought hard against being put at the mercy of its creditors. In the end, however, it has not succeeded. It wanted the rescue funds to go direct to the banks that needed salvaging in order to avoid the situation where the Spanish taxpayer was forced to pay for the rescue, but it has not succeeded. Instead a half-way house has been agreed, with the Spanish government setting up a bank rescue fund (Frob) which will now borrow from Europe rather than the Spanish government, and then lend money to the stricken banks. However, the Spanish government will remain liable to repay capital and interest to those lending to Frob should it fail to obtain repayment from the banks in question. And of course, if the Spanish government is liable, this comes down in the end to the Spanish taxpayer footing the bill.
Causes of the Spanish collapse
As we have pointed out time and time again, the economic and financial crisis gripping the world is a classic crisis of overproduction of the kind that Marxism demonstrates is bound to affect the capitalist world periodically because of the contradiction inherent in capitalism between private ownership of the means of production, on the one hand, and the social nature of production on the other. The private owners of the means of production (i.e., ‘capital’) deploy them only for the purpose of accumulating private wealth, while the social producers – the working class – are squeezed as much as possible in order to maximise the capitalists’ profits. However, since it is overwhelmingly the working-class masses who constitute either directly, or indirectly through government purchases on their behalf of services such as healthcare and education, the market for the products of the capitalist economy, their squeezed powers of consumption cannot keep pace with the permanent need of capital to expand its production. Hence the recurring crises of “overproduction”. It is not that more is being produced than people need – it is that more is being produced than people can afford to buy. The least competitive capitalists are wiped out, along with all their workers, who are thrown out of employment by the thousand, and then cause a general lowering of wages because there is an oversupply of workers in relation to the supply of jobs available. This in turn undermines the general market for the products of capitalism still further, and so on in a vicious downward spiral.
What has this to do with Spain? Anybody familiar with the country will know that, upon joining the EU, open season arrived for hordes of better-off English, Germans, Swedes, Norwegian, Finns, Dutch and Danish workers – indeed all Europeans hailing from colder climes – to purchase a holiday home in Spain, or at the very least to go on holiday there and spend lavishly in its hotels and restaurants. The boost to Spain’s economy was vertiginous. Suddenly there were jobs aplenty in the construction sector, and at good wages too. Not only that, those who bought holiday homes also bought furniture, crockery, cutlery, art work, creating jobs in a whole host of industries – again, all at good wages. Add to that, an army of estate agents and lawyers had a heyday providing services to buyers and sellers of property. The increased prosperity that this brought to Spanish nationals had the better off among them also buying themselves holiday homes with all the appurtenances. While all this was by no means the whole of the Spanish economy, it did provide an extremely significant boost. Just as it seemed, however, that there could be no end to the building of more and more holiday homes, for which the whole of Europe, including even the former communist states, provided an unending market, all of a sudden the volume of prospective purchasers fell. This was principally the result of the accelerating process of relative impoverishment of workers throughout Europe, including the relatively well-off ones who had previously been able to afford second homes and foreign holidays. The number of people whose income was sufficient to pay a mortgage on a second home started to drop steadily. There were too few buyers for the vast numbers of properties still being built with money borrowed from Spanish banks. The developers went bust and the banks lost a great deal of the money. Thousands of people who had already bought homes with the aid of a mortgage found they could no longer keep up the payments and were repossessed. This affected not only the holiday homes of the better off, but also the main and only homes of thousands of poorer workers who were now losing their jobs. There were few buyers for the repossessed assets which frequently turned out to be worth less than was owed on the mortgages the bank had given. Again Spanish banks lost out heavily there. While it is officially accepted that Spanish banks are holding some €180bn of problematic property loans (out of a total lent of €323bn) there is a fear that, amidst the prevailing conditions of economic stagnation and recession, up to a further €100bn are also at risk. As if that were not calamitous enough for the banks, many depositors, realising that the banks’ solvency was under threat, withdrew their deposits – with, for example, €97bn (representing about 10% of Spain’s GDP!) being withdrawn in the first three months of this year alone! Needless to say, new depositors were very few and far between, and Spanish banks resorted with great alacrity to the special 3-year cheap loan facilities put in place by the European Central Bank this year. Borrowed at interest rates of 1%, the money was largely used for the purchase of Spanish government bonds offering a return of 6%, which slightly improved the banks’ financial position – at the expense of the Spanish taxpayer who has to pay the interest. According to Landon Thomas Jr writing in the New York Times of 7 June (‘Madrid leans on its troubled banks to buy its bonds’), ” Spanish and Italian banks have been the most aggressive borrowers from this lending window, and they have funnelled much of this money back into the coffers of their home governments”. This cosy arrangement ensured that there were always buyers for the bonds issued by the Spanish government to cover its regular borrowing needs at rates of 6% or less, which is considered affordable. Furthermore, since under European banking regulations, European government bonds carry a zero-risk weighting, banks are not required to set aside any money to guard against borrower default, ” even though these assets in reality may be among the riskiest that the banks own”.
The Spanish banks worst affected are obviously those most exposed to mortgage lending, which are the ‘cajas’, the savings banks closely akin to the British building societies. Spain’s most troubled bank, Bankia, was formed in December 2010 from the merger of seven ailing cajas to become Spain’s third or fourth biggest bank. Last year Bankia shares were floated on the Madrid stock exchange in order to raise much-needed capital to the tune of€3.3bn. However, as the economic situation worsened and the capital flight from Spain accelerated, Bankia had to be rescued in May by the Spanish government from the verge of collapse with a €19bn purchase of Bankia shares to provide it with sufficient capital to keep going. This rescue amounted to a dramatic role reversal: suddenly instead of the Spanish banks supporting the government by lending it money to cover its budget deficit, it was the cash-strapped Spanish government which needed to provide money to its banks.
On 7 June, the credit ratings agency Fitch Ratings, was the first to downgrade Spanish sovereign debt from A to BBB, just above junk status. The net result was that interest rates demanded by prospective lenders began to rise to unaffordable levels, forcing the government to apply to Europe for support. Although the Spanish government was asking for support for its banks, it is clear that the support is actually for the Spanish government which can no longer depend on Spanish banks for its borrowing needs.
What of the future?
The €100 bn borrowing from Europe adds 20% to Spain’s sovereign debt, as a result of which the money borrowed to avert a crisis has in fact just as much potential to precipitate one. The more heavily indebted a borrower is, the riskier it is to lend him more money – and the same is true of governments. As a result, the amount of interest that lenders will demand in exchange for taking the greater risks is bound to increase. Spain’s banking system may have been saved, but its borrowing costs are still skyrocketing, with the 10-year rate now approaching 7%.
The lack of enthusiasm of lenders for Spanish bonds is compounded by the fact that the latest bailout money is likely in fact to be provided from the new €500bn European Stability Mechanism due to come into effect this month (July 2012) when all the 17 eurozone countries have ratified the fiscal treaty. The ESM, however, will lend money only on terms that its repayment to the ESM takes priority over the claims of all other creditors. In case of sovereign default, the ESM must be repaid in full before any other creditor gets a single penny. As Peter Spiegel says, writing in theFinancial Times of 11 June 2012, this ” could spook private lenders, who are unlikely to appreciate €100bn in new debt jumping the queue” (‘Bailout lite: how rescue differs from Greece’).
Moreover, in order to generate the income to pay this interest, to say nothing of repaying the loan itself, the Spanish economy needs to grow substantially, but instead it is shrinking. And it is shrinking precisely because of the austerity measures adopted by the successive governments (first the social-democratic government of Jose Luis Rodriguez Zapatero and now the conservative one of Mariano Rajoy) aimed at reducing the budget deficit so it would not need to borrow so much in future:
“Spain lurched into recession on Monday for the second time since 2009, as data underlined the considerable challenge Madrid faces in repairing the eurozone’s third-biggest deficit while its economy shrinks.
“A Bank of Spain monthly report showed gross domestic product falling 0.4 per cent in the first three months of 2012, adding to a 0.3 per cent contraction in the previous quarter.
“The two consecutive quarters of negative growth took the country into a technical recession that has been well-flagged to financial markets. Spain’s centre-right government already predicts the economy will shrink by 1.7 per cent this year and most economists expecting a recession to deepen as the summer approaches.” (Miles Johnson, Alex Barker and Jamie Smyth, ‘Spain slides into recession, figures show’, Financial Times, 24 April 2012).
Nouriel Roubini and Megan Greene writing in the Financial Times of 10 May 2012 (‘Desperately seeking a bailout for Spain and its banks’) noted:
“Anyone who has closely followed developments in the eurozone will be struck by déjà vu looking at Spain’s current predicament. The corrosiveness of banking sector uncertainty for investor confidence in Spain is reminiscent of Ireland in 2009 and 2010. Spain’s austerity-recession feedback loop is similar to the process that fed the economic contraction in Greece and Portugal.
“And yet despite the clear signs of failure in the existing bailout countries, the EU looks set to pursue an unchanged plan in Spain. But the crucial difference between Spain and the bailout countries is size. If things go wrong in Greece, Portugal and Ireland, a second bailout is affordable. But there can only be one roll of the dice for a country as large as Spain.
“A bailout package would buy some time for Spain, but time will only help if it is used to generate economic growth…” But the need to service its debts will act as a massive drag on Spanish competitiveness, making it only too likely in this world of shrivelling markets that economic growth will prove elusive and that Spain can only sink further and further into the mire of insolvency.
Wolfgang Münchau, writing in the Financial Times reflects the current editorial opposition of his newspaper to austerity as a means of combating the effects of crisis:
” Are the markets panicking because Spain may fail to hit its deficit targets, or are they panicking at the thought Spain may succeed … The investors I know are worried that austerity may destroy the Spanish economy …
“The orthodox view, held in Berlin, Brussels and in most national capitals (including, unfortunately, Madrid), is that you can never have too much austerity. …
“When Mariano Rajoy, Spain’s prime minister, began to outline the deficit cuts for 2013 last week, the markets panicked … and drove Spanish 10-year yields back to 6 per cent. The targeted fiscal adjustment amounts to 5.5 per cent of GDP over a period of two years. It is one of the biggest fiscal adjustments ever attempted by a large industrial country. It is perfectly rational for investors to be scared.
“European policy makers have a tendency to treat fiscal policy as a simple accounting exercise, omitting any dynamic effects. The Spanish economist Luis Garicano made a calculation, as reported in El País, in which the reduction in the deficit from 8.5 per cent of GDP to 5.3 per cent would require not a €32bn deficit reduction programme (which is what a correction of 3.2 per cent would nominally imply for a country with a GDP of roughly €1tn), but one of between €53bn and €64bn. So to achieve a fiscal correction of 3.2 per cent, you must plan for one almost twice as large.
“Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give. Either Spain will miss the target, or the Spanish government will have to fire so many nurses and teachers that the result will be a political insurrection.” (‘Spain has accepted Mission Impossible’, 16 April 2012).
Spanish economy in the doldrums
As a matter of fact, the Spanish government has already fired “so many nurses and teachers”, adding to the thousands who have lost their jobs in the private sector as a result of the economic downturn. One of the reasons that the European authorities are not imposing austerity conditions to its bailout of the Spanish banks is precisely because the austerity measures Spain has already taken voluntarily are as severe as it is possible for them to be .
Yet despite the austerity – or because of it – matters are going from bad to worse, and the attempts to REDUCE Spain’s sovereign debt are only ending up in INCREASING it, and increasing it substantially:
” As the government sought to calm fears Spain – Europe’s fourth largest economy – might need a further bailout, the Bank of Spain said that as of the end of the first quarter, the combined debt of the central, regional and local governments stood at 72 percent of gross domestic product.
“That’s up from 65 per cent in the same quarter last year and 68.5 per cent at the end of 2011.
“It’s also double the 35 percent debt load that Spain had in early 2008, when the country’s financial woes began with the bursting of a real estate bubble that had fuelled years of growth.
“The government has predicted that the debt load will hit 80 percent by year’s end, though economists expect it to rise even further as a result of its acceptance of a (euro) 100 billion ($125 billion) loan to prop up its fragile banks. Because the government will be responsible for repaying the banks’ bailout, the sum will add to its public debt .” (Craig Mackenzie, ‘Home-made rockets and balaclavas: 8,000 striking Spanish coal miners attack police as country’s debt crisis continues’, Mail on Line, 18 June 2012).
It is notorious that Spain’s unemployment rate is 25%, with youth unemployment over the 50% mark. And the Spanish people are not taking the assault on their livelihoods lightly. Last year thousands came out to occupy the streets in the ‘Indignados’ movement. This month has seen some 8,000 Asturian coal miners on strike since the end of May, fighting back with home-made rockets against the assaults of the security forces of the Spanish state in an endeavour to defend their mines, which have been operating for literally centuries, from a closure brought about by a severe cut in the subsidies provided by the state to keep them open. On 15 June a 2-hour battle took place at the El Soton mine, as the miners fought police who were wielding tear gas and rubber bullets. These protests have barely been covered in the bourgeois media, who would obviously not like the example provided to the downtrodden of the world of the fighting spirit of the Spanish miners to spread any further.
As interest rates payable by Spain to service its ever-rising sovereign debt continue to increase, while government income continues to fall as a result of recession, the spectre of a Spanish default is gaining substance by the hour. And if it defaults this will be an even greater disaster for its creditors than any haircuts they have had to bear in order to keep Greece (barely) afloat. If, as is feared, Greece leaves the euro currency union, throwing most of its euro-denominated loans into default, it is estimated that French banks would lose €20bn and German banks €4.5bn, which would cause those countries problems enough. Spain is the eurozone’s fourth largest economy, and in falling it is bound to drag others down with it.
The domino next to Spain is Italy, which not only has a mountainous national debt of its own – proportionately one of the highest in the eurozone at a shocking 120% of GDP – but is going to have to add to this debt in substantial measure to help bail out other eurozone countries. Although Italy’s budget deficit is now very low, its economy is also in deep recession and nobody can see where the money would come from to finance existing borrowing, never mind any increased borrowing. It will be recalled that the technocrat Mario Monti was parachuted into Italy in November last year to take charge of its finances with a view to correcting the ‘profligacy’ of his elected predecessors. Since he came to power, the Italian economy has weakened drastically. It is expected to contract 1.5% this year and maybe increase just 0.5% in 2013, while unemployment has gone up to over 10%. Although this may look good by comparison with Spain, nevertheless investors are quite adept at reading the writing on the wall. Italy is clearly on its way to insolvency, therefore, it’s best to get out now while the going is good. As a result, bankers are reporting that “deposits have been fleeing Italian banks for havens in Switzerland“, according to Liz Alderman and Elisabetta Povoledo writing in the New York Times of 11 June 2012 (‘Worry for Italy quickly replaces relief for Spain’). If Spain is the eurozone’s fourth largest economy, Italy is its third. As the bank coffers empty, either the banks will be rescued by a government that cannot afford to do so, or they will go bust at the expense of their creditors all over Europe. And the next domino is France whose banks are heavily exposed to southern European debt…
Nor should it be imagined that Germany, the spider at the centre of the web, is going to be able to ensure that financial woes are confined to others as Europe is a major market for the exports on which it has been thriving. A bankrupt Europe is bad news for Germany too. It is also bad news for the rest of the capitalist world which is dependent on exports.
All the great and the good of international economics expertise met on the weekend of 16-17 June 2012 at a G20 Summit Meeting in the luxury seaside resort of Los Cabos in Bajo California Sur in Mexico much more associated with billionaires and film stars than with serious hard-working people. The purpose of the gathering was to find a solution for the economic crisis.
They might as well have devoted all their time to enjoying the beach and the sun for, try as hard as they may, they will never find any solution to capitalist crisis under capitalism.