walter russell mead peter berger lilia shevtsova adam garfinkle andrew a. michta
Published on: May 26, 2012
New Spanish Finance Horrors Shock The World

It may be a holiday weekend in the United States and much of Europe (where the Monday after the feast of Pentecost is often celebrated as a holiday), but the world’s politicians, central bankers and financiers are too busy quaking in their boots to bask in the sun.

The problem is Spain, which dropped two stink bombs on the world. First, the cost of bailing out just one of Spain’s many doomstriken banks shot up from €4.5 billion ($5.6 billion) to €23.5 billion ($29.5 billion). This is money that Spain’s cash strapped government doesn’t really have; it is under orders from Brussels to reduce its budget deficits and has already slashed spending even as youth unemployment hits a Detroit-level 50 percent. This news isn’t just bad in itself; it means that the other zombie banks in Spain (and there are plenty of them) are going to be much, much more expensive to rescue than previously believed.

The other piece of bad news is potentially even worse. This came in the form of a statement of the president of Catalonia that his regional government is running out of money and needs a bail out of its own. Catalonia, a region in northeastern Spain which speaks its own language and hosts an independence movement, is as the FT notes bigger than Portugal in terms of GDP and accounts for one fifth of Spain’s economic activity.

Why has this piece of bad news terrified global elites? In the first place because it demonstrates that in addition to huge costs in bailing out its banking sector the insolvent Spanish central government is going to get hit with massive bills from not only Catalonia but its other regional governments. It is going to have to go to the financial markets hat in hand to borrow more money than expected — this is going to drive interest rates up in Spain (and probably in Italy and Belgium) just at the time when Europe’s financial markets were trembling on the brink of yet another panic. And it means that Spain is likely to come to the EU much sooner than expected with a much bigger bailout request than anybody thought.

And there’s more. For the true connoisseurs of the European disaster unfolding so majestically and irresistibly before us like a train falling off a bridge in a film shown in slow motion, it means that the political ability of the Spanish authorities to manage their country’s dire financial predicament is closer to collapse than most European officials have grasped.

Spain is an unhappy federal structure held together by subsidies and crooked accounting. The drive of Catalans and Basques and others for independence has been checked by a system in which the regions of the country have gained more and more fiscal and policy autonomy. That worked pretty well when Spain was booming, the markets were as bubbly as a glass of champagne, money was cheap and credit was good.

But now the music has stopped. Spain’s new European paymasters want the country to march in lockstep. They want the central government to sign austerity agreements that will bind the Catalans, the Basques, the Galicians and everybody else. Essentially, they are demanding that Spain recentralize, and that the national government set out tight national budgets that tell the ‘autonomous’ provinces what they can and can’t do.

This may not work at all, and it cannot work for long. Spain is a democracy. People vote. Sometimes they vote for regional parties, sometimes they vote for the big national ones. If the central government is imposing tough fiscal limits on the provinces, it’s likely that over time — and not much of it — support will shift away from the national parties to the provincial ones. The Catalans will be sure that they are getting cheated by the poorer provinces; others will also believe that they aren’t getting their ‘fair share’.

Between the banking and the provincial debts and the politics of the whole sorry mess, Spain’s government is in an untenable position. As in the Greek case, Europe is demanding actions from Spain that Spain cannot take. This is not policy; it is death.

The news from Spain is so shocking because it is making a lot of people think that Greece is not an isolated case. That is the thin, fragile reed of hope to which Europe’s dwindling band of optimists have clung: that Greece is different, that its insoluble problems are unique, that the inability of the European system to find an acceptable road out of the Greek crisis is a one-off.

But if the steps required by European authorities are also beyond the capacity of Spain to take, we have a very different and much grimmer future to await.

In the short term, the kind of bank run that has been troubling the sleep of European policy planners for the last couple of weeks begins to look unavoidable. (A company that services ATMs in Europe reports unusual withdrawals in Italy as well as in Greece.) The richest and savviest Spaniards have been ditching their country’s shaky banking system and assets in droves for some time; there are signs that some of the less affluent and less savvy Spaniards are sniffing the smoke and edging towards the exits as well. Should the specter of bank runs materialize there will not only be the need for lightening fast action by the ECB and other authorities to stop what would otherwise metastasize into a financial Armageddon; the effect of this kind of insecurity on mass psychology and the behavior of European citizens would unleash uncontrollable and unpredictable political forces. The herd would stampede, and nobody really knows what comes next.(Already there are reports that Greeks resident in the UK are taking out British citizenship even as the UK makes emergency plans to block immigration if the euro should collapse.)

But assuming we somehow get past the prospect of a crisis and the financial equivalent of martial law in the short term, the news from Spain has made Europe’s deepest fears much more credible. Those fears are that the SS Europa, that ‘unsinkable’ ship launched with such fanfare and so much acclaim, is headed toward an iceberg and that it is too late to turn.

What is beginning to look likely in Spain — that the financial meltdown of the country is imposing burdens that the political system cannot sustain — could also be true of Europe as a whole. Europe’s policy makers think they see a path — difficult, but possible — on which Europe could tiptoe past a Greek meltdown and still hold together. It has always been much more difficult to imagine a way to handle a meltdown of Spain with its much bigger economy and its greater population.

The greatest hope for a non-catastrophic outcome to the European crisis has for some time been that Greece really was sui generis and that the other Club Med members could somehow limp into port even as Greece sank. The recent news from Spain suggests that it, too, may be holed below the water line.

Photo courtesy Shutterstock.

show comments
  • Charles R. Williams

    One of the silliest approaches to the European crisis is the concept of contagion. If Greece can be contained, Spain and Italy will be spared. They all have the same fundamental problem. In toto, they cannot be saved without the German taxpayer assuming their debts. The Germans would be insane to assume these debts but their economy will also suffer if Spain, Italy, and/or their banks default. German prosperity is largely founded on mis-priced credit risk. This of course was the fundamental flaw in the Bush economy that crashed in 2007-8.

    The train wreck has been brought to a crawl by the Germans assuming more and more responsibility for the debts of Europe. This reality was artfully disguised by the politicians and the underlying premise was that if the crash could be delayed long enough it could be avoided.

    When the Germans decide that collapse is inevitable, they will pull the plug on the whole show.

  • Soul

    I can’t believe anyone in the family will be thrilled to send another generation to Europe. We’ve already had two fight there, one generation in particular that didn’t farewell during and afterwards as a result.

    Imagine it is only a matter of time till conflicts eventually breakout in Europe. Hope not, but seems we are heading down a similar path.

  • Kenny

    1. The Germans are not rich enough to bailout this sorry mess. Fact.

    2. Britain is planning controls to stop an influx of immigrants from Greece, Spain, etc.
    So much for open Euro-borders, heh?

    3.Socialism fails … yet again.

  • Eurydice

    If this doesn’t confirm that Houdini won’t make it out of the tank, just wait for Italy and France.

  • jetty

    And the effect on the American market, short term and long term, will be … ?

  • Eurydice

    @Charles R. Williams – “mispriced credit risk” is fuzzy way of saying the Germans are bailing out their own banks. They can pull the plug if they want, but they’ll still have to deal with their banks.

  • Eric from Texas

    Jetty @5

    Not good, and not good. Probably dooms the re-election chances of President Obama.

  • thibaud

    Can someone please get Mead a copy editor and stop Via Meadia’s abuse of “horrors” and “death”?

  • Andrew Allison

    There’s a fundamental fallacy in, “As in the Greek case, Europe is demanding actions from Spain that Spain cannot take. This is not policy; it is death.” The simple truth is that Club Med is living off borrowed money, and the lenders have decided to stop throwing good money after bad. The governments concerned will be forced to act when the money runs out. The standard of living enjoyed by Club Med must fall, and there’s nothing the governments or their victims can do about it. The US would do well to recognize it too is spending at an unsustainable rate.

  • Steve0

    It’s unlikely to end in a WWI or WWII type conflict: who would be the aggressor? I could believe widespread rioting, and perhaps civil wars, but there’s no reason the US would get involved in an of that.

  • Corlyss

    “New Spanish Finance Horrors Shock The World”

    Why would that be, since even the stones in the streets saw this one coming since May 2010?

    Fretting about default is a lot worse than the default itself. Lots of nations have defaulted. The earth didn’t open up and swallow them like Sodom. They are still here, reoganized and healthier than before. The bankers and the pols should just get out of the way and let it happen.

  • Jacksonian Libertarian

    The Dominoes are starting to fall.

  • Lorenz Gude

    I was going to chide WRM and his starving interns for giving into the gods of yellow journalism by using the terms ‘shock’ and ‘horror’ in the same headline. But the article does not disappoint and serves up satisfying portions of of both.

  • don

    So, the Greeks are telling the Germans, pay up or we all die, sucker. The Germans are telling the Americans we’re not doing this alone, sucker. So, what are the odds the Europeans get their fiscal cart behind the monetary horse in the land of windmills and spent chivalry? What’s the odds of the Americans, Canadians, and the Mexicans forming a more perfect fiscal union?

  • fenceboards

    Somehow the general population of these countries wanted the Utopia the elites promised as it was supposed to be free as in someone else will pay.The no better as it is going the same direction. The stuborn Germans are the pinata as the other members want to take them down with them.Misery loves company.

  • hacimo

    The silliness of the current bailout plans for countries like Greece and Spain is the idea that somehow Germany is so loaded that it can assume all the bad debts. I don’t think this is really possible since, below the surface, it is also quite weak. Germany simply cannot rescue Europe and would go under itself. Thus the only real way to unwind the situation in an orderly fashion is for the ECB print the needed money and to accept a massive inflation. Unfortunately at the moment the ECB has no legal power to do QE of this sort. Thus the law must be changed very fast or disorderly defaults become a certainty. I think the disorderly default is the likely scenario. The current price action suggests that the Bond market, the gold market and the Euro market all agree with me. Massive deflation and debt default is the verdict.

  • irrabit

    Anyone 15-20 yrs ago looking at demographic trends could see European implosion occurring this decade. EuroWastrels couldn’t be bothered to have kids, or to save, or to maintain basic industries. They ignored all lessons of history and now they pay the price.

  • Andrew Smith

    Correspondents write about countries not being saved and the Greek political class itself claims that a failure to vote for what they want would mean “[Greece] will remain isolated for many years internationally. It will not have food, medicine, or fuel. It will live in a constant blackout.”

    What silliness.

    There have been so many cases of countries failing to repay their debts, devaluing heavily and going on to recover and prosper. Readers will be familiar with Argentina’s example (which they are throwing away), and France and Greece have repeatedly busted over the past century or so.

    Usually these claims are the basis for avoiding any consideration of alternatives which do not suit the speaker – such as leaving the Euro, leaving the EU and regaining democracy and accountable government.

  • whispers in the gallery

    I’m about to go to Spain in less than a week. Pray that nothing outrageous happens.

  • JGallen

    This is outrageous libel. You should seriously be sued.

  • Paulishus

    The socio economic challenges of the now generations will mean some form of chaos and anarchy. This is a generation that ha no prior reference point in time. They will refuse to starve. What will come first after the collapse of europe? Certainly the new immigrants to Europe will become scapegoats and targets of xenophobia and the rich will capitalise amd the poor will become “enslaved” prior to the revolution. Maybe tje mayans werent wrong. The world as we know it will end where rice not flour are the new staple!

  • artsservicesboston

    They all have the same fundamental problem.Imagine it is only a matter of time till conflicts eventually breakout in Europe.The Dominoes effect would be crowling.

  • quiche

    the same fundamental problem has rolling down not just in europe. Massive deflation and debt default is the verdict.

  • Mr Shush

    Those claiming that history proves default to be comparatively benign are ignoring the sheer scale of near-simultaneous regional, national and private financial sector default which would be involved in this case. There simply is no historical parallel, but the closest would be the Great Depression. The correct policy solution is to realize losses, print money to support depositors but not shareholders or bondholders, liquidate only what needs to be liquidated but all of that, take the hit and allow organic growth to resume (cf Iceland). This policy will not be followed.

  • NEF

    Why don’t the banks just print more money, they’ve been doing it since the beginning of time. No one’s fingering the banks, who ultimately are responsible for all this global mess. Their rabid obsession with control is going to bite them on the [behind] eventually.

  • Fernando

    whispers in the gallery, be calmed, everything is fine in Spain.

    People is getting the same salaries or similar as some years ago. Spaniards are fine and the country is OK. If you come here you will see the Crisis is so rude and cruel on TV, but not in real life. I guess if you see the TV talking about Spanish crisis you will imagine people sleeping in the streets or something like that hehehe, but is not like that. Is like Policemen are earning 2000€ instead earning 2200€, in example and people is unhappy, but just that.

    I must admit we have problems, since we have about 10.000.000 inmigrants, with no qualifications, with no future, not able to find a job cause even some of them doesnt speak spanish… And many companies are in bankrupt, that one that were not strong 5 years ago…

    People is fine here, is only the TV talking about Crisis all the day, … Ignore it. Press are enjoying this a lot.

    Just a spaniard with bad english.

  • Sefuela

    From Spain. Spanish average cost of debt is 4.07%. Not so bad. We can afford paying it, even with refinancing cost about one or even two points higher. Administration structure is really a mess. We voted for a racionalization of it. Should be done.

    Public banks have been madly managed, ok. Should we get our banks bankrupt because of valuation criteria thought in order to prevent banks going bankrupt? I hope someone thinks a little bit about this.

    Basilea III is a good measure, but not for this time.

  • Tom

    It’s time for Spain to return to the peseta and trade with their Latin American compatriots.

  • pep

    This article is missing most points. The Spanish state deserves to be where it is. For the last decades it has invested most of the resources in useless infrastructures such as the high speed train rail, that costed an average of 100k€/km. It has 7 times more high speed rails than Germany, which has around three times more demand of it(and something like 1.7 more population). Right now, the spanish state is the second country in the world in high speed train km, right after China. Many of this outrageously expensive rail lines are connecting towns with populations around 50k inhabitants. The result is in many of this lines with an average of 20 passengers a day. They had to close, and all the money(million €) wasted. On the other hand several newly built airports also had to close for the same reason. As an example, Germany has over 20 airports with international connections(these are the really expensive airports to maintain, not the intra-state ones), and most of them have positive balance. Well, in Spain there’s around 50 of them, and as in the railway case, they are located in ridicolously small towns with, no offense, no really big projection abroad. Some examples can show that some of these airports in the month of July ( supposed to be a high traffic summer month) proved to have more staff working at the airport that actual passengers. This is yet again millions of euros wasted.
    Some interesting projects to ‘refresh’ the economy in the Iberian peninsula have been proposed. But they have been put down repeatedly by the spanish government. In particular we can see examples of Barcelona airport not being able to fly to cities in US, and having to make a connection with cities like Zurich, Paris, and of course Madrid. There actually used to be a law resolution that did not allow Barcelona to fly to Us and countries alike. How can the economy grow like this?
    The author groups the basques and catalans together. Well there is a huge difference. Basques have always had a positive balance belonging to Spain, in practical terms they receive more money than they invest in the State. They just pay for Royalty and army. On the other hand catalans have been paying increasingly more and more, and receiving less and less. In the last years the infrastructure investment in catalonia(which is seen as one of the engines of the spanish state) dropped somewhere less than 50%, that’s a lot, if we take into account that other regions did not loose in investment. As a global catalans have a deficit around 10% cause of belonging to Spain. And their are still blamed for most of the things, and as can be interpreted from this article, are considered not solidaire with the state.
    Well, Catalonia together with other regions like Balearic Islands, and Valencian Country are the regions in all Europe that contribute more to the state they belong to. Also, many experts agree that around 60% of the debt of the State is not cause of the regions, but cause of the central state. Nevertheless, the resources have to be reduced in the regions(which translates to reducing healthcare and education), instead of being reduced in the state ( which would reduce not so socially impacting stuff such as army, and infrastructure).
    Some people say that the government in Spain is stupid, and they do not know how to do things properly. I think differently, I think they know what they are doing very well, the problem is that their agenda is not the one that everyone would think(getting the state out of this economic dwell), but building a nation (the spanish one) which does NOT exist by force if necessary. And of course doing political favours ( see all the amount of bank directors with political past).
    Also, Fernando, will all due respect, the situation is really screwed, of course the world keeps moving and something like 60% of the people is earning just a little bit less. But whole families have been moved out of their houses cause of mortgages, and MANY more people do sleep in the streets. So please let’s stay real.
    This article is unfair, and not documented, nice try.

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