May ended in Spain with frantic attempts to prevent the collapse of the banking system, saddled with a massive amount of toxic loans linked to the housing bubble. The government attempted to involve the European Union in the rescue of Bankia, while there were rumours of IMF plans for a bail out of Spain. Meanwhile miners have gone out an all out strike in defence of jobs.
The miners are blockading roads with burning barricades in the mining counties and 10,000 of them marched in Madrid and warned that “next time round we will come with dynamite”. It was a graphic image of the enormous contradictory tensions which have built up in Spain and which now are reaching boiling point. The capitalist class wants to make the workers pay for the crisis, but the crisis is so acute that this is already creating a massive social explosion. The “markets” (i.e. bankers, investors, speculators) doubt that Spain will be able to solve its crisis, sending the risk premium on Spanish bonds to unsustainably high levels. The differential between Spanish and German bonds is now over 5.4 percentage points, a record high, and Spain is being asked to pay 6.6% interest on state bonds, very close to the 7% level which triggered the bail outs of Greece, Portugal and Ireland.
As we have explained before, the two fault lines of the crisis of capitalism in Spain are the massive debts accumulated in its banking system as a result of the housing bubble which fuelled the previous growth cycle, and the budget deficit which has been accumulated by the state as a result of the economic crisis itself and the initial bailout of the banks.
House prices in Spain have only come down by about 20% since their peak (much less than the 45 to 50% drop in Ireland or the US for instance). Some economists calculate that they have to fall by at least another 20% before they stabilise. The banks lent massively to individuals to purchase their homes. Many of the borrowers cannot pay for their mortgages as they have lost their jobs (unemployment has risen from 1.8 million in 2007 to 5.6 million now). The banks also lent massively to building companies, many of which have gone bankrupt or are sitting on an enormous amount of empty finished houses or empty land which they cannot sell on the market.
The total amount of housing credit (to individuals and building companies) on the balance sheets of Spanish banks is probably close to one trillion euro. There are different calculations of how much of that is “risky” or already non-performing. Estimates vary between the €150 billion officially recognised and €250 billion, but as the crisis worsens (Spain is in recession again), this figure is likely to grow even further.
Spain went through over 14 years of uninterrupted economic growth during the period of the boom. European banks were happy to lend massive amounts of money to Spanish banks and became heavily exposed to the Spanish banking system. German banks alone hold 180 billion euro of Spanish private debt.
The banking crisis has come to a crunch with the collapse of Bankia, the country’s fourth largest bank. The bank was created in 2010 through the merger of a series of cajas (regional savings banks) that were in difficulties and €4 billion of state money. Now the government has been forced to nationalise Bankia and will have to pump in another €19 billion. Some 340,000 small investors, who were tricked into believing this new bank was sound as it was backed by the state, stand to lose everything.
It is not only Banka that is in trouble. The Spanish government, which has already been forced to nationalise 8 banking institutions, has passed a series of financial sector reforms, forcing the banks to find tens of billions of euro to cover themselves against non-performing housing related loans.
The key question is: where the banks are going to find the necessary money (over 80 billion euro) to comply with the new government regulations? It is clear that they cannot go to the markets to raise the money, but the state cannot raise the necessary amount to bail them out. The low estimate of the cost of this bailout is €100 billion. As a comparison, the budget cuts approved this year amount to around €30 billion.
Spain wants the European Central Bank (in effect Germany) to intervene. The ECB is resisting. The US has said it backs Spain’s position... which is that Germany should pay! It is of course easy to be generous with someone else’s cash. The Spanish government complains that it has already done everything it could to put its house in order with massive cuts in public spending, a brutal counter-reform of the labour law, etc. This is all true. However, those “reforms” are not enough for the markets to recover their “confidence” in Spain and the risk premium on Spanish bonds keeps rising. No sane investor will trust a government that ran a budget deficit close to 9% of GDP in 2011. The European Union therefore replies that the measures are not enough, that cuts and “adjustment” must be implemented quicker (for instance bringing forward the rise in the retirement age), but that it is prepared to give Spain an additional year to meet the target of bringing the budget deficit down to 3% of GDP (a target which is completely impossible to meet anyway).
As we have explained before, the problem with Spain (and also Italy) is that these two countries’ economies, unlike Ireland, Portugal and Greece, are too big to be bailed out. Spain is the fourth largest economy in the euro-zone. The cost would be unbearable for the European economy as a whole. However, they are also too big to be allowed to collapse. This is the contradiction that Spanish and European (in particular German) capitalists are faced with.