Payback time for the financial sector that was bailed out by taxpayers, the new government thinks.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
It’s payback time for Spain’s financial sector. At least that’s what the country’s new center-left coalition government appears to believe. After receiving the biggest financial bailout in the country’s history — over €60 billion in direct state aid, and as much as €371 if you include all the recapitalisations, the mass buyouts of impaired assets, the deferred tax credits and government guarantees — it’s time for the banks, which have been racking up profits of late to return the favor.
But the banks are not in a generous mood. The deputy governor of the Bank of Spain, Javier Alonso, warned that hiking taxes on bank profits could result in shrinking credit, higher fees and less interest on deposits, which is already about as low as it can get. If banks don’t pass on the additional costs to the consumer, it would mean “less profitability” for the sector, in an environment of ZIRP-induced wafer-thin margins, he said.
So far, the banks have been able to get around this problem of tight margins with a combination of ruthless cost cutting, closing over 40% of branches, and laying off roughly a third of their workforce over the last 10 years, and relentless fee gouging.
In a fit of brazen hubris, the CEO of Bankia, Ignaci Goirigolzarri, argued this week that there’s no moral case for raising taxes on banks. “It makes sense when there are negative externalities in a sector, but that does not happen in banking,” he said. Given the untold trillions of dollars of damage caused by the last global financial crisis, it’s an outlandish claim for anyone to make. But this is coming from the leader of a bank whose collapse shortly after its IPO seven years ago cost taxpayers over €22 billion and set the stage for Spain’s worst recession in decades!
Goirigolzarri isn’t the only senior banker opposed to paying a bit more in taxes. According to Carlos Torres, the CEO of Spain’s second biggest lender, BBVA, retail banks such as his own have zero responsibility for the last crisis; the culprits were Spain’s woefully (and at times criminally) mismanaged cajas (savings banks) that collapsed in unison the moment Spain’s real estate bubble began deflating. It’s an argument that’s often used to absolve Spain’s commercial banks of any blame for the country’s crisis.
Like all good myths, it has an element of truth to it. Most commercial banks in Spain, with the notable exception of the now-defunct Banco Popular, were less reckless in their mortgage lending than the savings banks. That said, the commercial banks did play a part in fueling Spain’s madcap real estate bubble, just as they’re trying to stoke a new one right now by offering high-risk loan instruments such as the 100% mortgage.
More to the point, if the country’s taxpayers hadn’t intervened when they did, essentially underwriting the cajas’ losses, the contagion would have probably spread to Spain’s commercial banking sector, by which point banks like BBVA would also have begun teetering. Instead, the bailout, together with Draghi’s pledge to do whatever it takes, stemmed the immediate panic and the cajas’ assets — good and bad — were transferred, at great public cost, onto the balance sheets of Spain’s biggest commercial banks, thus massively increasing their market share.
In other words, without the help of taxpayers Spain’s five biggest banks may well have collapsed. They certainly wouldn’t be as big as they are today. Now, much to their unconcealed displeasure, the government wants the banks to repay the favor, by contributing more to the state’s coffers.
It won’t be the first time a European government has raised taxes on lenders’ profits since the crisis began ten years. The UK’s notoriously bank-friendly government hiked taxes on banks in 2015, with minimal fallout. The Macron government also levied a one-off tax on large French corporations, including the banks, last year, which was also met with howls of outrage. The hardest hit lenders were France’s three largest mutual banks, Crédit Agricole, Banque Populaire-Caisse d’Epargne and Crédit Mutuel.
In Spain the new tax could cost the sector between $800 million and $1 billion, shaving 7-8% off its consolidated profits, according to Swiss bank UBS. The worst affected banks are likely to be those most dependent on the domestic market, since the tax will only be imposed on profits earned in Spain. The three smallest of Spain’s five largest banks, Caixabank, majority state-owned Bankia, and the perpetually troubled Banco Sabadell, could suffer a 10% hit to their profits, while the impact on the country’s two biggest and most international banks, Santander and BBVA, will be around 2-3%.
This is happening at a time when Spain’s banks are going to have to start learning to live without the so-called deferred tax asset (DTA), which allows banks (and other companies) to carry forward their bountiful losses from crisis-ridden years to offset their tax liabilities in the future. Spanish banks are home to a staggering €50 billion worth of DTAs, The “assets,” though they have limited, if any, liquidity value, have been declared “high quality” for years, and thus were included in regulatory bank capital, enabling banks to significantly increase their “capital buffers,” at least from a cosmetic viewpoint.
Now we’re in the so-called “good times” the banks have been cashing in their chips, with some even receiving net fiscal income from Spain’s tax office last year. But the game is almost over. The new government is already threatening to put an end to it, and if it doesn’t, the new regulation brought into effect by Basil III almost certainly will. This development is likely to have a massive impact on their balance sheet health. According to Moodys, if the DTAs disappeared, Spanish banks would have the weakest core capital in the Eurozone. Perhaps it’s no wonder the banks are protesting so much about all this talk of taxation. By Don Quijones.
BBVA, Spain’s second biggest bank, is the biggest loser in the collapse of the Turkish lira. Read… As Turkish Lira Collapses, Foreign Banks in Turkey Rue the Day
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