It’s Getting Uglier in Spain

No government, no problem.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

With all the world’s attention focused on the slow-motion disintegration and belated — and possibly ill-fated– “rescue” of Italy’s financial system, other somewhat smaller but nonetheless important crises are going unnoticed in Europe’s hinterlands. They include the gathering problems in government-less Spain.

Last time Madrid had an elected government was 232 day ago. Even after a second round of elections in June, there is no guarantee that Spain’s two major parties, the Popular Party (PP) and the Socialist Workers’ Party (PSOE), will find enough common ground to form the so-called Grand Coalition that the country’s banks and corporations have their hearts set on. And without that, a third round of elections, in December, is almost inevitable.

The task of setting a stringent, Troika-approved budget for 2017 — by far the European Commission’s biggest priority for Spain — will have to be put on ice, just at a time when the country’s public debt remains perilously close to record highs. According to the Bank of Spain’s raw figures, i.e. before “adjustments,” Spain’s total debt surpassed €1.5 trillion euros at the end of the first quarter of 2016. That’s over 140% of GDP, more than triple what it was in 2007.

Political chaos and growing public indebtedness are not the only problems Spain faces. There is also the issue of internal strife in the country’s central bank. Over the last 15 months external investigators have probed the Bank of Spain’s role in the approval of allegedly fraudulent financial statements in the run-up to Bankia’s highly dubious IPO, in 2011, which ended up costing retail and institutional investors billions of euros. This, together with internal disagreements over how best to implement new ECB regulations, has sparked a mini mutiny among the bank’s inspectors and middle managers.

In June a large group of the bank’s employees sent a joint communiqué to Bank of Spain Governor Luis Linde bemoaning the acute lack of tools and resources available for conducting “effective supervision” of the financial sector. Unless remedied, the letter warns, the situation could lead to yet another financial crisis.

Linde responded with an internal memo in which he lauded the bank’s efforts to harmonize its traditional “rigor” with the new requirements established by the ECB. He also rejected any suggestion that the ECB’s Single Supervisory Mechanism was “ineffective.”

Last week, the internal power struggle claimed its first victim with the resignation of Fernando Restoy, the bank’s deputy governor. Restoy was widely considered to be the real boss at the Bank of Spain. It was Restoy, and not Linde, who oversaw the complete restructuring of Spain’s saving banks in the wake of the crisis. Restoy was also president of both the Deposit Guarantee Fund (DGF) and Spain’s Fund for Orderly Bank Restructuring.

But now he’s gone, having departed last week for a job at the central-bank-owned, Basel-based Bank for International Settlements (BIS) – “a bank for central banks,” as it says – where he’ll be working directly under his former boss and now BIS General Manager Jaime Caruana.

Meanwhile, in Spain the banks continue to exhibit signs of strain. Just today, the National Securities Market Commission (CNMV, Spain’s financial markets regulator) requested additional financial information from eight of the 35 companies listed on the country’s benchmark index, the IBEX-35. They include Spain’s biggest bank, Santander, and its biggest ever rescued bank, Bankia.

The financial regulator has asked for clarification on how the banks formulated their accounts as well as more data on their valuation of certain assets and liabilities, reports El Economista. This adds to fears about Santander’s financial health just weeks after the firm’s U.S. subsidiary, Santander Consumer USA Holdings Inc., the country’s largest subprime auto-lender, delayed its Q2 results, purportedly due to “certain accounting matters primarily related to the Company’s discount accretion and credit loss allowance methodologies.”

At almost exactly the same time, former JP Morgan Chase starlet Blythe Masters resigned as the company’s non-executive chairwoman, after less than a year on the job.

If the CNMV is now flagging up Santander’s latest results, then something serious must be amiss. After all, this is the same regulator that has been repeatedly caught sleeping on its watch, in open-and-shut cases like Bankia, Gowex and OHL. It was even shown up by a 17-year old student, who in his final-year school project detected serious flaws in the accounting of Abengoa, Spain’s biggest ever bankruptcy, three years before they came to the attention of the CNMV’s army of officials — and that was only because Abengoa’s auditor, Deloitte, finally refused to sign off on the company’s accounts!

Now, after eight months of negotiations with its creditors, Abengoa is seemingly back on its feet. Granted, seven thousand jobs have been lost along the way, most of them in Spain’s southern region of Andalusia where unemployment is already at a staggering 29%. Many of Abengoa’s most profitable business operations have also been sold off and its stock now belongs mainly to international hedge funds. But for now, the firm is alive.

The one thing that no one seems to notice — because no one wants to tell them — is that Spain’s taxpayers were once again left on the hook, this time for €250 million worth of government guarantees. The government is also considering allowing the participation of the state-owned Official Credit Institute. In other words, if things go sour, which is more than possible given that Abengoa now represents a shadow of its former self and the interest it must pay on its new debt is around 15%, the company’s new creditors will be cushioned from the pain by Spain’s eternally generous but never, ever consulted taxpayers. And all this without an elected government. By Don Quijones, Raging Bull-Shit.

OHL, one of the largest global construction companies, has equally escaped scrutiny of Spanish regulators. But investors smell a bigger rat, beneath the bad numbers. Read…  Despite Shady Accounting, Construction Giant Suffers Rout

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  36 comments for “It’s Getting Uglier in Spain

  1. Not to worry, Jamie Dimon will put together another coalition of private lenders to make the hurt go away. They will make hundreds of millions in fees and the taxpayers will get stuck with the downside. Same ole, same ole.

    • NotSoSure says:

      +1. I am getting tired of these articles saying such and such is getting uglier especially in Spain and Italy. With JPM and the world’s most innovative bankers on the case, nothing is going to happen, except the banksters making more money.

      Not a sarcasm, just truth.

      • STeve says:

        -1000
        “The way to make money is to buy when blood is running in the streets”

        I’m not sure you’re familiar with this planet’s current business model….66.6% of the people who died in WW2 did so at the hands of their own……

        Wolf, I too am tired of these articles with “facts” and “numbers”, please include more info on becoming trans, things that are pink, and how money should be digital…thanks

    • Chip Javert says:

      Restless Boomer

      Ok, I’ll pay the silly game: let’s stipulate JPM and all other nasty ole investment bank have to stay away from Spain’s corrupt, bust, tax-payer supported banks (you know, because they charge A LOT for their services).

      No JPM help. So now what happens? All of a sudden bank managers get competent and actually do their jobs? Or even more impressive: the Spanish regulators get (dare I say the word) competent and manage to steer banks out of financial trouble? Or miracle of miracles, politicians refuse bank campaign contributions?

      Not going to happen. The crooks running Spanish government and the corks running the banks will now pay the only guys who can help them find more money: JPM (or maybe GS).

      Complaining about paying JPM for coming in to help fix this mess (at least until all the new money is stolen) is like getting mad at the plumber who fixes your water leak. Why get mad at the plumber?

      • zalacain says:

        Not a single Spanish bank has been rescued. Several ‘Cajas’ similar to building societies were, but not a single independent bank. Unlike in the UK were several banks had to be rescued at a huge cost to the tax payer.
        Bankia which is made up of failed cajas, appears to be well run and now makes a profit.
        I would argue that Germany’s financial system with its huge number of self-regulating cooperative banks is the biggest danger to the Euro. Right now you don’t see it because the German economy is growing, but any hiccup will expose these institutions’ fragility. Not to speak of Deutsche Bank.

        http://www.bbc.com/news/business-36723034

      • Winchelsea says:

        Because they’re a mad plumber that isn’t a plumber at all – they’ll ‘accidentally’ create a connection between the clean and waste water systems, add in a couple of time delayed leaks, forge the certificates, and pay off the local courts so any subsequent action against them will fail.

        • Chip Javert says:

          Winchelsea

          Ok, I thoroughly get your point.

          However, I am amazed at the amount of anger focused on the clean-up team (no matter how dubious). That anger (and more) should rightly be focused on crooked bank managers, crooked regulators and crooked Spanish politicians who, year after year, steal money from banks.

          One small quibble: American anti-bribery laws are comprehensive, they’re strongly enforced and they have strict consequences. Your casual comments indicate you think JPM violates these statutes – what’s your evidence? Are any credible Spanish newspapers alleging JPM bribes courts? I suspect all you got is something along the lines of “BUT YEA, MAN; I KNOW JPM BRIBES COURTS”. Grow up; be an adult; at least have some kind of justification for a serious claim like that.

          I’m not a JPM fan, but totally unfounded serious accusations like that cost you your credibility.

      • Romancing the Loan says:

        I see you’ve joined the TINA school of eternal bailouts and a world of no consequences for those who borrow and lend poorly, greedily grifting away safe in the knowledge that the mess will be somebody else’s to clean up.

        Here’s an idea: let the lenders take the hit. Tell me again why the taxpayer should be on the hook?

        I mean I know why… I just want to hear the lame sky-will-fall this-is-for-your own good justification one more time…

        • Wolf Richter says:

          “Let the lender take the hit…” should be rephrased: let stockholders, bondholders, uninsured depositors, and other creditors take the hit in a bank resolution.

        • Romaning the Loan says:

          Wolf,

          I strive for and frequently fail to achieve brevity. But I’m fully on board with your more exhaustive explanation of the lender. I’m not even particularly freaked out at the thought of uninsured depositors taking the hit.

          I’m a depositor. I keep my deposits under the insured limit, and if and when I’m lucky enough to approach it, I open an account elsewhere. Seems only prudent.

          If eschewing public bailouts would put large, uninsured deposits at risk – after stockholders and bondholders, of course – so be it.

          The world would be a far better place if depositors would learn how to read a balance sheet and felt the need to verify a bank’s trustworthiness trusting it with their wealth.

          I think it’s clear that stock holders and bondholders should…

          Oh what’s the point? The scam is that the moneyed class knows all this full well, as do the policy makers, both in on grift… making big returns on miss-priced risk backstopped by a captive working and middle class taxpayer.

          No amount of analyses and debate is going to restore any kind of fiscal or monetary integrity to the Republic.

  2. r cohn says:

    I enjoy Mr Quinjoes articles.He writes well and his articles are consistently logical.But Mr Quijnoes misses the ONE OVERRIDING FACTOR that overwhelms all others,i.e. Central bank intervention.As long as the markets accept that a CENTRAL BANK can print money out of thin air ad infinitem in order to buy bonds (and etfs in Japan),DEFICITS DO NOT MATTER.Therefore ,tax payer bailouts do not matter nor does enforcing tax collection..
    IMOP the next step is to structure a means for the Central banks to de facto write off the debts that they purchased..The Central Banks can either write off a small % of the bonds in their portfolio each year or they can be structured as an exchange of zero coupon 100 year bonds for the bonds that they currently hold on their books.Then the Central banks can write a small % of these year. The advantage of the latter is that the issuers of the bonds,be they countries or corporations incur no interest obligations
    We are living in an Alice in Wonderland world in which down is up and up is down

    • Chip Javert says:

      r cohn

      Ahhh…if only central banks could actually do that printing thing forever.

      Unfortunately here in the real world they can only do it right up to the moment that massive inflation takes over. Please reference Venezuela, Zimbabwe and Germany’s Weimar Republic.

      The EU is a huge place with over 500,000,000 citizens, so while Spain, Greece and Italy are in the crapper, the rest of the EU will take a little longer. I have complete faith that the screwballs running EU finance will end up destroying the value of every last euro. Within 10 years you’ll need a billion euro bank note to buy bread.

    • Oliver says:

      This sort of slow, creeping erosion of the currency is far more likely (and insiduous, because it leaves current institutions, structures and elites in place) , imho, than the cataclysmic scenarios peddled by a lot of ´the-end-is-nigh crowd´.

      It ain´t going to happen, and I EVEN think the effect of all that CB money printing is starting to show in the real economy … and if it is, that will be a SHOCKER.

      Can you imagine the headline on Zero Hedge:

      ¨This just in: NIRP and ZIRP policies may be working …¨

      • Winston says:

        “This sort of slow, creeping erosion of the currency is far more likely (and insiduous, because it leaves current institutions, structures and elites in place) , imho, than the cataclysmic scenarios peddled by a lot of ´the-end-is-nigh crowd´.”

        That’s exactly what I see ahead. Thanks to central bank games, everyone becomes Japan and there is a slow motion FX and economic race to the bottom. This is the worst possible scenario.

        A huge crash would mark a clear bottom, allowing investors on the sidelines to reenter the market in droves. It would also FORCE bankruptcies beyond any practical degree of “rescue,” allowing the essential Darwinian force of true Capitalism to work.

        Instead, we’ll get more of what we have been getting, but it will gradually get worse over time and since it will be a case of gradually bringing a frog to a boil just as it has been thus far, there won’t be major public demands for reform.

      • STeve M says:

        I can tell the two contributors above me are family men, as their hope for their families well being and survival is clouding their common sense…
        “This sort of slow, creeping erosion of the currency is far more likely (and insiduous, because it leaves current institutions, structures and elites in place) , imho, than the cataclysmic scenarios peddled by a lot of ´the-end-is-nigh crowd”

        EARTH TO OLIVER, what you are describing started 40 years ago at the Bretton Woods Conf…They’ve been slowly and stealthily diluting the dollar and hiding it with futures contracts, treasury manip, Petro dollar, Prec metals manip, etc. Your life saving isnt worth squat but you just dont know it yet…

        Wolf, you and DQ write great articles….Thanks!

  3. Pining4 says:

    @. r Cohn – I believe you are correct, that ultimately, this is indeed the plan for world CB’s… At least that’s what they tell themselves. ‘We can always buy up all our debt then just write it off if all goes poorly, it’s our Get Out Of Jail Free card. Therefore, deficits really do not matter’. Whether they can, in real life, take their currency (and every person’s pay check, pension, and life savings denominated in it) and basically move the decimal place two spots to the left without causing mass chaos, upheaval, and open riots by this freshly beggared populace is, shall we say, something they seem not to care much about. Perhaps such things don’t occur to them at the Olympian heights from which they see the world. I suspect they will give it more attention when the rabble breaks into their compounds, loots their private stores, and kills the staff with reebar and make-shift clubs.

  4. Keith says:

    The time is coming when there will be too many holes to plug even for central bankers.

  5. MC says:

    When things go wrong, nothing beats another round of financial repression: yield on 10-year Spanish sovereign bonds hit 1% yesterday for the first time… ever.
    I’d like to remind here when things were going swimmingly smooth for Spain in 2002-2009 average yield on the same bonds was around 5%.

    The Troika can stomp its feet and put up the usual kabuki performance but nobody believes them anymore. It’s completely useless to bare one’s teeth, shout threats and frothe at the mouth while at the same time enabling “fiscal irresponsability” to the tune of tens billion euro each month. What’s next? Fining a country one billion but saving it ten by driving bond yields to zero?

  6. Oliver says:

    I beg to differ. Spain is doing just fine – or better than Don Quijones (I love that name – priceless) makes it sound:

    – Tourism is up a whopping 12% y/y,
    – unemployment has started falling, and the number of new jobs is substantial
    – the government has just gotten a waiver on the deficit targets, so no budget cuts needed; fiscal policy is supporting growth
    – gov borrowing rates on 10 year paper – I think – are at 1% ….
    – car sales are up 15+%

    Yeah, public debt is running at 140% of GDP, but with the ECB´s current NIRP policy, who cares ? It actually makes sense to take advantage of low rates available to the Governement to bail out large corporates.

    And, yes, the constant stream of ever more surreal (corporate) scandals and bailouts make for juicy headlines, but they do not seem to matter to the markets because of the massive liquidity in the economy.

    The political stalemate is something people have gotten used to, and yes it doesn´t look good to the EU, but it´s far from a crisis situation.

    No crisis or impending collapse here.

    • nhz says:

      It all works great until rates revert to normal values. By then it will be obvious that nothing has been solved in Europe, and most of the EU governments, citizens and companies are bankrupt. Until then everything is just theater.

    • MC says:

      Then why people in Catalunya (which should be Spain’s wealthiest region) always ask me about jobs elsewhere each time I am there? I haven’t seen it happen anywhere else, but I haven’t been in Greece in over two decades and I have no intention of going back.

    • STeve M says:

      Im starting to think Oliver is employed by a certain group of “fiction peddlers,” because you really have to try to be this ridiculously optimistic, and its to a fault..
      “And, yes, the constant stream of ever more surreal (corporate) scandals and bailouts make for juicy headlines, but they do not seem to matter to the markets because of the massive liquidity in the economy.”

      Spain’s Social Security Program is BROKE by 2018….Checkmate

      Oh and just so you sleep a little cozier at night, lets see if the oil running through the Russia/Turkey pipeline that was agreed to today will be priced in USD….Sleep tight

      Nope nothing to see here…

      • nhz says:

        “Spain’s Social Security Program is BROKE by 2018….Checkmate”

        quite an accomplishment, as Spanish social security amounts to very little…

        I guess the northern EU countries with their ridiculous entitlement programs (e.g. Netherlands, but probably much the same in other countries) are more clever in hiding unfunded liabilities ;-)

      • Romancing the Loan says:

        It just might could be.

        I’ll just add that if one can’t connect the dots between Spain’s current, slow-to-climax political crisis and the absolutely bogus-ginned up statistics that he cites –

        “Happy day! Our program is finally starting to take off, just on the eve of elections! Here – let me wag your tail. You’ll feel very content…”

        Well… if one can’t connect those dots, then one is likely mendacious or moronic.

  7. DV says:

    Looks like Spain is on track to become another Greece, albeit much larger. The yeilds on Spanish bonds fell to 1%, so the borrowing continues. But what happens when Drahi will have to disconitnue QE, which undermines banks.

    • nhz says:

      That is in no way different to what happens in the North of Europe. The epic housing bubble of the Netherlands is expanding again after lingering for a few years, with the highest number of new mortgages and housing transactions ever. Everyone who can fog a mirror can get a zero-risk, sub-1% mortgage in the Netherlands. The whole Dutch mortgage market is subprime by definition, but nobody cares: the ECB will make sure that those mortgages are paid off in 30 years with pocket change from grocery shopping ;-(

      Another Greece or Spain, just much larger financially ;-) And what the Netherlands does with housing, France does with government pensions and other EU countries have their own ways of making impossible promises that can only be guaranteed by the printing presses of the ECB working overtime forever.

  8. Chris says:

    Governments and Central Bankers are at that “Oh Boy” point where they recognize that they have painted themselves into a corner. There is no viable way to unwind the global economy from its massive debt. Even assuming there is a write off of ‘bad debts’ for nations, there is still the nagging problem of personal debt. In this consumption based economic scheme (a problem in and of itself) the globalists’ rely on the consumer to keep spending. However, the consumer is tapped financially and the growing tax burden to finance the ever growing sovereign debt further erodes their ability to consume. This cannot end well. At some point the global economy will crash and currencies will experience hyper-inflation. The opportunity to reset the system will present itself at this point. Enlightened leadership would see this as an opportunity to scrap a severely flawed system with a more balanced economic model. Alas, this would cut into bogus stock valuations of corporations and require countries such as the US to live within their means. An opportunity for real growth through honest price discovery will probably take a back seat to the same old same old. Continued conflict/war is on the horizon so long as the globalists insist on forcing the world’s population to their will.

    • Oliver says:

      Wishful thinking, I´m afraid. As much as a cleansing and reset of the whole economic and financial systems seem morally desirable, the reality will be a slow grinding decay where misallocation of capital slowly corrodes the real economy.

      This will go on for much longer than most people think or hope. Think Japan – it´s been going on for, what, 26 years, and nothing has changed !!

      • Chip Javert says:

        Oliver

        Yup, Japan has undoubtedly done a world class job of hosing up their own financials.

        They also have a couple other nasty things working against them: old & rapidly advancing median age (46.1; Spain = 40.6; USA=36.3) and declining population growth rate (-0.20%, Spain=0.09%; USA= 0.74%). In both of these demographic metrics, tenths of a point have a HUGE impact.

  9. EVENT HORIZON says:

    The problem stems from “When a People…..” want independence. This is what our Declaration of Independence. Seems that nobody wantsw to ask; What do you mean by “A People”.What gives them the “right”? What gave us the “right” to rebel against England? What gives the Hebrew People a right to their own Nation State? Even asking these questions makes you a potential Racist. Why should any “PEOPLE” in Spain have a right to have a “separate, but equal, Nation”?

    What is the REAL QUESTION HERE?

    • Chip Javert says:

      Event Horizon asks “What gave us the “right” to rebel against England?”

      You refer to the American Declaration of independence, but you must have been beyond the event horizon the day you were supposed to actually read it. Had your been there, you would have learned man’s nature (God) gave him the inalienable right to self determination (no vote of the EU required).

      The 1st & 2nd paragraph state:

      “When in the Course of human events, it becomes necessary for one people to dissolve the political bands … with another…to which the Laws of Nature and of Nature’s God entitle them…they should declare the causes which impel them to the separation.

      We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

  10. EVENT HORIZON says:

    There is a blog I used to visit, many times, and leave comments. I still read the blog but stopped writing comments since it was a waste of time. Why “Cast Pearls Among Swine”, as Joshua ben Joseph once, supposedly, said.

    This blog writer, whose name I shall not mention (Initials, MS) has spent YEARS talking about Greece getting out of the Euro One World Union. I kept reminding him, and his readers, that there is NO way in God’s Hell that Greece will leave. They can’t. The “rulers” of Greece work for the Euro Central Bank (a private company).

    I have been correct now for about 10 years. So, smart-ass, what does this have to do with Italy? The same thing. Nothing will change except the people of Italy will become more enslaved. They will not be allowed to revolt (they are not allowed to own guns) and they will just hand over more and more and more of their property, money, earnings, etc. to the Euro Central Bank (privately owned).

    More and more Arabs and Africans will poor into Italy. The Italian government will give them all free crap and they will vote to maintain and advance the Euro One World Government. The end result is the “REAL” Italians will be out-voted by the Arabs and Africans and will end up being peasants, once again, slaving away for the real Rulers.

    I am right. I know it…and so do you.

    • Wolf Richter says:

      Two things:

      >>> “…to the Euro Central Bank (privately owned).”

      The ECB, unlike the Fed, is NOT privately owned. It’s owned by the central banks of the member states, and these central banks (unlike the Fed) are public institutions (government).

      >>> “More and more Arabs and Africans will poor into Italy” and “… will vote to maintain and advance the Euro One World Government.”

      New non-EU immigrants in Italy CANNOT vote in national elections.

      • nhz says:

        new non-EU immigrants cannot vote in national elections, but I guess they can vote after 5 years or so when they receive permanent residence and free-everything for life (they can vote in several other EU countries).

        Labor and Green party politicians are salivating about all the new voters they have been importing, they just have to wait a few years before these migrants vote them into power again (their voter base has been crushed over the last few years), before populist parties have been able to stop the influx of economic migrants. And the conservative and liberal politicians are secretly salivating about how the influx of new citizens (who will never leave once in …) will push up RE values, rents and almost everything else that they can profit from.

        It’s quite obvious in Europe that foreign migrants have FAR higher priority for the majority of the politicians and the courts than ordinary citizens. And I don’t believe for a moment this has anything to do with humanistic motives. This policy was designed to crush Europe (not the EU bureaucracy itself of course) and especially the middle class.

    • Chip Javert says:

      Event Horizon

      Ya gotta love a comment loaded with comments like:

      o I have been correct now for about 10 years. So, smart-ass, what does this have to do with Italy?, and
      o I am right. I know it…and so do you.

      Nothing like an open mind, but I digress…

      In addition to Wolf’s factual points, Brexit invalidates your entire rant.

      • nhz says:

        Brexit has been mostly a non-event until now, and it might stay like that despite the UK separating from Europe on paper.

        Welcome to hotel EU-California ;-)

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