There’s a rich tradition of comedy in this country of ours and in many ways it’s what makes the quality of life what it is. Whether it’s a rowdy mob on the pavement outside an auction at the Shelbourne Hotel, acting like a bunch of balubas, threatening to sue the Man if they weren’t allowed into the auction to bid on a flat in Portlaoise, just as the IMF chief for Ireland happens to walk past en route to Government buildings to help sort out the aftermath of our property/banking collapse. Or there’s the amazing feat of having transformed our economy from one which in 2007 had a 25% debt:GDP with €25bn in the sovereign wealth fund (NPRF) to now face a 120% debt:GDP and our piggy bank depleted. And don’t even start me on cheese as an instrument to combat financial hardship. We really are a funny nation.
So it was probably appropriate that it was an Irish woman, Jill Forde that introduced the European Banking Authority stress test announcements last Friday week (the video is here), and the panel of three speakers included one of our own as well, John Fell from the ECB. It was a first class comedic performance as the latest stress test results were published by the reincarnation of the CEBS that produced last years widely discredited results – remember those were the tests that awarded blue rosettes to AIB and Bank of Ireland which a few months later needed €18bn of additional capital to remain open. There was a healthy dose of cynicism in 2010. This year there was cynicism fatigue as we were told that eight banks didn’t pass the stress tests and would need a total of €2.5bn of new capital so as to be properly capitalised in the eyes of the EBA. One of the banks to fail was CAM savings bank (Caja de Ahorros de Mediterraneo), a small Spanish regional bank which the stress tests concluded would need €947m of new capital to bring it from its 3% present capital reserve to a 5% capital reserve. Fair enough, at least the EBA did recognize that new capital would be required so that the bank would meet the EBA’s minimum standards.
And less than one week later, lo and behold, yesterday, Spain had to bail the bank out with €2.8bn of capital plus an additional immediate line of credit of €3bn. And for good measure the board of directors was fired. (El Mundo reports the story in Spanish, the Irish Independent has a summary). Okay the comedy timing wasn’t perfect, if the intervention by the Spanish central bank had taken place a week earlier, it would have been poetically timed to coincide with the EBA’s stress test announcements, but seven days later is still pretty good. Not only has this one bank needed more capital than the entire European banking system (or at least the 90 banks that comprised the stress test population) but additionally, €3bn was provided in liquidity funding by Spain’s central bank, rather than the ECB; and as we know in Ireland’s case, the collateral requirements at the national central bank are lower than the ECB’s – a letter of comfort from the Government is good enough here for the Central Bank of Ireland to lend money to domestic banks.
A general view had emerged prior to the publication of the stress tests last week that 15 banks would fail needing €30bn of additional capital. The results weren’t even greeted with cynicism, such was the low level of expectation. For one bank to need such a large intervention just seven days later would have been even more hilarious if the results had been taken seriously, but other than mining the results for some useful financial information, it seems the EBA tests were ignored. I wonder if these clowns will be back next year.
UPDATE: 10th October, 2011. I’m surprised that it has taken three months for the second stress-tested bank to succumb to begging for state assistance, but today French/Belgian/Luxembourgish bank Dexia announced that it to receive €4bn from the Belgian government as well as a €90bn state guarantee from France, Belgium and Luxembourg. Somehow I don’t think it will be another three months before we get another bank bailout…
NAMA Wine Lake 
“Spain’s central bank had to bail the bank out with €2.8bn of capital”
No, capital was provided by the FROB (El Fondo de Reestructuración Ordenada Bancaria).
Central banks don’t put capital in banks, they provide liquidity to solvent institutions and capital is a matter for the government.
@Alea, fair comment. Correction made.
A very funny commentary and worth repeating (for those who like to reread things). You could not make it up.
“There’s a rich tradition of comedy in this country of ours and in many ways it’s what makes the quality of life what it is. Whether it’s a rowdy mob on the pavement outside an auction at the Shelbourne Hotel, acting like a bunch of balubas, threatening to sue the Man if they weren’t allowed into the auction to bid on a flat in Portlaoise, just as the IMF chief for Ireland happens to walk past en route to Government buildings to help sort out the aftermath of our property/banking collapse. Or there’s the amazing feat of having transformed our economy from one which in 2007 had a 25% debt:GDP with €25bn in the sovereign wealth fund (NPRF) to now face a 120% debt:GDP and our piggy bank depleted. And don’t even start me on cheese as an instrument to combat financial hardship. We really are a funny nation.”
@NWL
This was posted by me yesterday under the EU sumit thread on NAM Wine Lake. Post number 8. It also correctly designates the origin of the bailout.
Jake Watts
Here is an idea of what is going to be popping up all over the perifery, “expected surprises”.
July 22nd
El Banco de España ha intervenido la Caja de Ahorros del Mediterráneo (CAM) para capitalizarla y ha sustituido a sus administradores a solicitud del consejo de administración. El FROB ha acordado inyectar en la entidad 2.800 millones de euros y otorgará una línea de crédito de 3.000 millones para asegurar su liquidez. Todo esto después de que la semana pasada, tras la publicación de los test de estrés, el BdE asegurara que ninguna entidad necesitaba aumentar capital. http://www.eleconomista.es/empresas-finanzas/noticias/3253238/07/11/El-Banco-de-Espana-entra-en-la-CAM-y-sustituye-a-los-administradores-.html
The Bank of Spain has intervened in the Caja de Ahorros de Mediterraneo (Alicante based Caja) with new capital and replaced the administration at the request of the board. EL FROB (The Fund for Orderly Bank Restructuring) will inject 2.8 billion euros and provide a line of credit for 3 billion to assure liquidity. All after just last week’s stress test and an assurance from the Bank of Spain that no institution would need capital.
@Jake, many thanks indeed. I chose the El Mundo report to link to in the above post, as it’s a more widely recognised publication.
The euro politicians and the EBA are still acting as if the problems in Europe can be resolved. The recent bank stress tests were a joke. And they assumed no Greek or Irish defaults. After the ECB’s soothing words last week, the markets have turned their attention to Italy and now especially to Spain, with reason, as we can see above. There is a banking crisis of massive proportions in our future
The Irish government continues its deflationary policy and constrains the pace of economic expansion. Unemployment will remain unacceptably high and even with the safety valve of emigration further increases cannot be ruled out. The weak labour market and non-existent mortgage market will continue to push home prices lower.
Government and EU spin lasts only for a day or two now before the markets transparently see it for the lie that it is and the trend in sovereign interest rates ratchets up again.
This is the first crack of gargantuan proportions in a huge dam.
Couldn’t agree more (for once ). All spin and little substance – too much being taken on trust as regards the Private Sector Initiative. However, “much done, more to do” as the slogan goes.
Unfortunately, Mr. Market is usually right and if he isn’t he takes steps to make sure that he is.
@WSTT. “The weak labour market and non-existent mortgage market will continue to push home prices lower.”
Agreed.
I’m fearful of a tidal wave of mortgage defaults which I think might put NAMA in the penny place. There is real suffering out there with the ordinary Joe’s and the mortgage avalanche has to hit soon. It was the banks that funded the ordinary Joe’s to purchase the expensively priced house (and re-mortgage it for the car + holiday), which egged the developer/banks to further dissy heights. The developer and the banks that funded them (via foreign bonds) have been caught with their pants down.
Time has been expensively purchased with NAMA and recapitalisations, I don’t think the ship will be steadied enough when the next wave hits.
The ONLY solution is a commercial solution and that involves debt forgiveness, debt write-down, debt write off, without the crazy 12 year plus (no automatic discharge i.e. there are people who are and have been officially bankrupt for 25 years in this country) personal bankruptcy laws in this country. The LRC produced an excellent way forward last december. Law change in this area is part of the bailout. Alan Shatter came out with an non-earth shattering proposal about a month ago in this area.
We are heading for social upheaval unless a way-out is given to the ordinary Joe.
@JR
I agree completely. In the USA you can hand the keys back and walk away. The more prices fall and interest rates increase here, the greater likelihood of massive mortgagor revolt. In the end the banks will have to embrace debt forgiveness or some form of debt for equity swap, if only to save their own skins. The cleanest way would be straight debt forgiveness.
Spain is engaging in Ponzi financing. It has hardly any nominal growth in GDP and the nominal growth that it has is below its debt service growth. It has to issue new debt just to finance the old debt. And that is why interest rates are rising (and will continue to rise) on Spanish debt.
Spanish banks balance sheets are septic from property loans that have not been written down. If Spain had to underwrite its banks, it would be insolvent.
@NWL
“And for good measure the board of directors was fired.”
Well done Spain. In Ireland several pre-2008 board members continue to draw huge board (now effectively State) salaries. At lease the Spaniards have the guts to start giving out P45s to the favoured elite. Ireland is still tipping the forelock to the people who have wrecked the country.
Have the Irish bank board members no shame? Have their fellow directors no shame in allowing them to continue as directors?
We know the Dept of Finance has no shame.
It is time for Noonan to do Spain on these people. Fire them. Terminated by virtue of wipe-out of shareholders funds.
And sue them for loss of shareholders funds.
The other “expected surprise” in Spain is the financial condition of the Autonomous Communities. The party in power, PSOE, of Zapatero, has been hiding the real accounting numbers. Recent elections where the PP opposition has won control have found the coffers bare. Latest case is Castilla La Mancha, capital Toledo, south of Madrid, which is bankrupt. In many respects, Spain is in worse shape than Greece, especially real estate where they make the Irish look like the Amish. It will be very interesting when the public sector in Ireland is faced with what is happening in Spain.
The reaction has been a brutal austerity:
The regional president of Castilla La Mancha, (PP), reminded the group that “she has reduced the number of public employees by half, and fired 40% of the part timers in the junta organizational chart”, to which one should add the firing, in the five provinces of the region, of the delegationes of the various advisory boards. (translation by me)
La presidenta regional ha recordado que “ya se han reducido a la mitad los cargos públicos, así como en un 40% los eventuales en todo el organigrama de la Junta”, a lo que hay que añadir la supresión, en las cinco provincias de la región, las delegaciones de las distintas consejerías.
http://ecodiario.eleconomista.es/espana/noticias/3252297/07/11/Cospedal-examina-las-empresas-publicas-de-CastillaLa-Mancha-para-detectar-cuales-son-prescindibles.html
[…] Just one week after the EBA stress tests, one Spanish bank needs €2.8bn of capital. More than the … […]
Remember September. Or maybe October…….
Spanish administrative structures are completely different from those in Ireland. Power over the majority of Public Sector functions is exercised locally and not by the central Government.
There is also a regional variance in income per capita within the country much greater than is seen in other EU members. Northern provinces such as the Basque territories have incomes up with the best in Northern Europe while southern provinces. This is at least partially caused by the inability of the Central Government to redistribute income from the richer, (non Spanish) provinces of the Basques & Catalans to the dirt poor Spanish speaking regions of La Mancha
The lack of re distribution of income has led these poorer provinces to depend on borrowing to provide basic services, education etc.
The biggest threat to Spanish stability is likely to occur after the next General Election. The next Government will probably be led by the PP, but who will have little support in large parts of the country, particularly the Basque territories. The recently formed party BILDU will likely be the largest Party in the Basque lands with the more moderate PNV in second place, giving a a mandate for complete independence. The PP will follow their normal Francoist approach and ban them, leading to uproar etc.
The Irish public sector is one of the smallest in Western Europe and recruitment has always been managed independently of elected politicians.
However back to Ireland. Easy Let, the Letterkenny based auctioneer has a mixed bag of houses, sites etc. for auction at the end of the month. Some of the prices still seem a little on the high side. However €69,500 has the reserve for a four bed house in Letterkenny begins to look reasonable, if you have to live in Letterkenny. With some savings, one could buy some of these houses with a five year credit union loan!
@Niall, thanks for mentioning the Easy Let auction on 28th July, 2011 in Letterkenny.
The catalogue is here and there appear to be 39 properties.
http://www.easy-let.org/auction/
The reserve prices for 3-bed semi-ds at ~ €130k makes this auction look more akin to the failed GMAC auction rather than the Allsop/Space auction.
Spain is full of dualities, banking, autonomous regions and, most importantly, labor. Old laborers in Spain are highly protected and the little hiring is mainly “part time” employees that do not fall under the favor of the old rules. This also is a stimulus for large corporations to expand off-shore. The youth unemployment rate in Spain is over 40%.
This bank rescue approach poses up an interesting question because if you follow Steve Keen, the Australian post-Keynesian economist and one of only 16 out of 20,000 economic pros to have predicted the “credit crunch” (aka Global Financial Crisis); he looks at economic analyses and produces his own economic models. His conclusion is that other than having no policy, we are taking the worst option:
(Hope that transfers OK, NWL)
The implications are that:
1. It is better to bail out borrowers than banks
2. The disruption takes c. 15 years to settle
3. Whatever is done or not done, we are left with permanently elevated levels of unemployment.