Editor’s note: This article was first published in February 2012 during the Spanish savings bank crisis and between the ECB’s two big long-term refinancing operations. Most institutions named no longer exist: Bankia was absorbed by CaixaBank, CatalunyaCaixa and Unnim by BBVA, and NovaGalicia became Abanca.
As if it were a love story, the government is still in love with that troublesome woman, the banking sector, to the point that its obsession with keeping her is putting even its own children (the citizens) in serious danger.
Not only are the banks’ privileges not being cut, they are about to grow, in a desperate attempt to apply one last patch and grant one last dance to the beloved before realizing that the relationship has no future and simply isn’t viable.
The role of the banks, as I understood it, was to lend money to citizens, not for citizens to lend money to the banks, which is what we are about to do. The new public aid will be channelled through the Fund for Orderly Bank Restructuring (FROB) in the form of loans, and the institutions will pay an interest rate of around 8%. Only institutions that merge will be able to apply for these loans, and the requirements will be tough, so many institutions that asked for this kind of aid would end up making losses because they could not meet their obligations.
In the “FROB 1” operations carried out in 2010, the State lent a total of €9,674 million to seven groups of merged savings banks (cajas). The one that received the most money was BFA-Bankia, with €4,465 million, followed by CatalunyaCaixa (€1,250 million), NovaGalicia (€1,162 million), Banca Cívica (€977 million), Caja España-Duero (€525 million) and Unnim (€380 million).
Clearly, the money the government lent to the banks hasn’t done much good. Far from improving the situation, the banking sector is rotting much faster and infecting the rest of the country.
The ECB is about to commit the greatest folly in history
The ECB (European Central Bank) has already made the serious mistake of lending €489.2 billion to the banks, money that went towards… nobody knows, because the banks didn’t open the credit tap.
Now the ECB is going to throw an open bar for the banks. In Europe they call it a liquidity auction or a liquidity injection, while the rest of the world calls it the eurozone bailout fund, or, in other words, the last dance. If the bailouts so far have been useless (just look at where we are now), lending more than 1 TRILLION euros (perhaps 1.5 trillion) to the banks once again means finishing off the eurozone for good.
The government needs to lend money, and the ECB needs to lend money, but they are lending it to the wrong kind of company, one with little solvency. I’m sure those billions upon billions could get the economy moving if, instead of going to the banks (a toxic business), they went entirely to SMEs or to large companies with liquidity problems. SMEs are the future of the economy, and large companies that fail will swell public spending through unemployment benefits. As soon as the flow of money makes a stop at the banks, the circuit halts, because the money goes to plug holes that may no longer be pluggable.
See also: €500: the mystery of money and global debt
Featured image: Rick Ligthelm from Rotterdam, The Netherlands, CC BY 2.0, via Wikimedia Commons.
