Solutions must be contemplated in relation to the magnitude of the problems for which they're destined. And the open-ended problem of the Spanish banking system was, until Saturday, certainly complicated. Despite provisions made in recent years, its solvency was seriously in question. This happened for two reasons: the excessive amount of bad real-estate loans on the balance sheets (the original cause of the financial crisis unleashed in the United States), and the prospect of low to no growth in the Spanish economy. Neither the defaulting of debtors nor the value of assets that act as collateral will move in a favorable direction in the coming months if demand in Europe isn't reactivated. It will be necessary, therefore, to get more capital for the banks. And to get it from private sources has been, in recent months, little short of impossible.
The option of it being European credit (from the Financial Stability Facility) that injects capital into the banks will offer the advantage that the Spanish treasury would not find itself increasingly obliged to resort to primary market debt issuance. That these funds should be given directly to the banking system, even if that's via the Fund for Orderly Bank Restructuring (FROB), will offer the advantage that it will be the banks, not public budgets, that will take on lenders' demands, the "conditionality" that Europe will impose.
Regarding the fundamental problem, then, we have removed one unknown: the origin of the bailout money. There are other questions, including the diligence with which the government will now move forward and the amount that will ultimately be requested and conferred from these funds.
Following this decision, the intensity of the "diabolical loop," which I have written about before -- the mutual reinforcement between declining bank solvency and devaluation of public debt -- may be softened. As for whether the bailout funds will be sufficient, and how they'll be distributed among the most exposed banks, that will depend on whether this decision will effectively contain the crisis, as is necessary. Now all that's left is to control what the banks do with these funds. Given everything, the solution could have been worse.
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This is nothing other than socializing the losses of private sector banks of Spain. These funds are now Public Debt and represent a liability imposed on every Spanish citizen to which they rightly have no responsibility for.
It will have NO economic benefit to the nation, however, it will exclusively benefit the bankers and their owners.
Banks do not need "capital" or reserves to extend loans, they need credit worthy customers. The world is no longer operating on a gold standard and hasn't for over 40 years.
There is next no demand for loans let alone credit worthy customers in Spain. Why would there be when the private sector already has record levels of debt, over 25 % and rising unemployment, over 50% and rising youth unemployment, deflated assets, rising poverty levels and nothing to look forward to other than increasing misery. Private sector firms and households all know this and have adjusted their plans accordingly.
Why is it the right wing neo-liberal ideologues who worship the "free market" renounce their religion and turn to the State to cover the losses of the private sector banks?
Enjoy your depression.
AFAI understand, all/ most of the money is needed for the public savings banks, Cajas. Savings banks, by definition, are in public ownership - and thus responsibility. So, we all are the "shareholders" of our respective national savings banks and they are backed/ guaranteed by the state/ national budgets.
The question is, would you also prefer to let them go bust (and probably have the leftovers picked up by private banks)? Or more pointedly: If you reject to support even public savings banks, what should in your point of view replace the financial sector? Where would businesses and people get a credit/ loan? Do you prefer to go back to agrarian, self- sustaining societies?