Thursday, July 12, 2012

Europe Requires Spanish Public To Suffer Massive Losses As a Condition to Bailing Out Spanish Banks

Kicking the Spanish People While They Are Down – The  Erroneous European Policy Continues

Regardless of whether or not one approved of the U. S. bailout of its banking system, the fact is that government (under Conservative George W. Bush) recognized the problem, acted and for the most part the problem of near insolvent banks in the U. S. is behind us.  Not so Europe.  They did not recognize the problem in places like Greece and Spain, and like most problems it got worse and now has to be confronted.

So Europe will now recapitalize the banks in Spain, the banks that financed a real estate bubble so great that without a bailout the entire Spanish economy would collapse.  But Europe never misses an opportunity to make a bad situation worse.  So now they are imposing a condition that small Spanish savers lose large amounts of money.

European authorities are pressing Spain to inflict billions of euros of losses on small savers by wiping out certain types of bank debt before its financial institutions are recapitalised using eurozone rescue funds.

The principle here is valid but inapplicable.  In recapitalizing the banks the investors and bond holders should lose, they have no right to be bailed out.  But in the Spanish case these are not big institutions or wealthy individuals.

“The difference between Spain and other European countries is that these instruments are held mainly by retail investors,” said Daragh Quinn, a banking analyst at Nomura. “People who bought them might not have known exactly what they were investing in”.

Luis de Guindos, Spain’s finance minister, has admitted that investors should not have been sold the savings products and he had sought to minimise their potential losses under a eurozone rescue. “It was an error to sell the the preference shares, and we will have to look for solutions,” he said in May.

What Spanish banks did was to sell bonds and preferred stock to ordinary people, most likely under the guise that these were safe and secure investments, like deposits.  So in this case Europe should make an exception and keep small investors whole.  Not only is that the fair thing to do, but it is also good policy.  If the average Spanish family loses a large share of their investments, they will not have funds to spend to stimulate the Spanish economy.  Things will only get worse.

But Europe of course never ever misses an opportunity to do the wrong thing.  So there is no reason to think they will do the right thing now.  Besides doing so would break a long string of inept, incorrect and inappropriate policy decisions.  Let the streak continue! 

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