Some may think that the Spanish crisis ends here – that once its main black hole has been closed, credit will start to flow again, lowering unemployment levels and pushing up GDP. However, let’s remember that capital was not leaving the country in large amounts due to the specific insolvency of our banks, but because of the general insolvency of the whole country. The reasonable doubts about whether private and public debt will be repaid without a substantial haircut or without leaving the euro are the true cause behind the capital asphyxia that Spain has been suffering for the last twelve months.
And these doubts remain as high as ever: national solvency as a whole is not better off one single iota after the bailout; the hidden losses of banks have just been transferred to the government liability side and lastly to Spanish families and firms, who now owe 100 billon euros more than a week ago. In no sense, therefore, should this bailout be seen as a final solution to our problems: on the contrary, things may become much worse in the medium term.
The fact that no explicit conditions have been imposed on the Spanish government just means that, despite now being much more indebted than before, no additional efforts to reduce its deficit (8.9% of GDP in 2011) will be undertaken. After the European line of credit, Spanish public debt, having been one of the lowest in Europein 2007 (less than 40% of GDP), will rise at the end of this year to 90% of GDP. Who can possibly trust in an economy with a 90% debt-to-GDP ratio, a structural public deficit around 7-8% of GDPand an unemployment rate above 25%? Who would be willing to extend credit to any government, firm or family facing a similarly difficult and uncertain scenario? Who can consciously keep their investments in Spanish assets when, as a consequence of reckless big-government measures, the final outcome of our crisis may be leaving the euro and returning to a weak and plunging currency? Even if banks became overcapitalised (something that is not going to take place, since their deficiency of capital is closer to 150 billion than to 100 billion euros and thus they will need at least two more years to complete their restructuring), in the absence of solvent demand for credit on the part of Spanish economic agents, no true rebound can be expected to occur.
This is why the lack of conditions associated with the Eurogroup’s loan is not necessarily good news for the Spanish economy. It is definitely great news for the government, who will be enjoying of 100 billion euros without being bound to further reduce its expenditures; but not for those of us who eventually are going to repay this loan with higher taxes instead of lower governmental spending. The bailout has only allowed something that without this intervention would never have happened in the market: our government has increased its liabilities by 10% of GDP in order to bailout our bankrupt banks. Instead of pressing our politicians to study other much better options for taxpayers and the economy – such as a compulsory debt-to-equity swap among the creditors of the banks, like the one that the libertarian think tank Instituto Juan de Mariana proposed for Bankia two weeks ago – the Eurogroup has allied with the Spanish government so that Spaniards can be financially sacrificed in order to cover bad investors’ gambles.
It does not seem to be the wisest policy to have a healthy banking system at the expense of an unhealthy and vampirised private economy. Don’t allow the irrational euphoria to mislead you: the government is better off (but just in the short run), bankrupt banks are better off, but families and firms are much worse off. This is the true result of the European bailout: increasing indebtedness for taxpayers; no real austerity for tax-receivers.
Juan Ramón Rallo is Director of the Juan de Mariana Institute.