There’s nothing like a sympathetic Supreme Court.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Spanish bank stocks had their best day’s trading for months on Wednesday, with the MCE Bank Index rising by 2.6%. At one point the stock of interminably troubled Banco Sabadell had soared over 13%, before settling to finish the day up 2.5%. The reason for such market exuberance was perfectly rational: After two days of deliberation, 28 Supreme Court judges on Tuesday evening voted by a thin margin (15 to 13) to strike down a previous ruling by a different set of Supreme Court judges that would have hurt the banks’ lending business by forcing them, rather than mortgage borrowers, to pay the contractual tax on mortgage loans.
It’s the first time in the Supreme Court’s history that it has flip-flopped like this, by overturning a ruling of its own creation.
What terrified the banks was the prospect of the change of law being applied retroactively, resulting in crippling legal costs and compensation. Spain’s legal system allows customers to reclaim compensation from tax authorities for cases going back four years. That could have could come at a cost of €5 billion, Budget Minister Maria Jesus Montero said on Tuesday.
In the worst case scenario for the banks, in which the ruling would have been applied retroactively to the past 15 years, the maximum limitation period for civil claims, the total bill could have run to over €16 billion — almost the equivalent of two years of the banks’ net domestic profits.
After two and a half weeks of legal limbo that had brought Spain’s mortgage market to a virtual standstill, Spanish banks have won a multi-billion euro legal battle that will calm investors, enrage mortgage customers, and inflict serious damage on the already battered reputation of the country’s judiciary.
The Supreme Court’s original decision, taken on Oct. 18, was supposed to be final, but as soon as it was announced Spanish bank stocks began falling like flies, with some hitting new multiyear lows. That was enough to prompt Supreme Court Judge Luis María Díez-Picazo to flip-flip and suspend the ruling less than 24 hours after its passage, citing the acute “economic and social impact” it was having — meaning the banks were in trouble!
But even that did little to calm investors nerves. By the middle of the following week the shares of Spain’s five largest listed banks were down 40% from January. Since then, the banks have been furiously lobbying to minimize the fallout from the Supreme Court ruling, arguing that in other European countries it’s the mortgage customers, not the banks, who pay equivalent taxes.
But even the banks were not expecting such a happy outcome. If recent statements are any indication, most CEOs had more or less come to terms with the notion that in the future lenders would have to foot the bill for the mortgage tax, which would have set them back around €650 million annually — a cost the banks could have been borne quite comfortably, especially if they passed it on to consumers in time-honored fashion.
While the banks celebrate their good fortune, public trust in government, already low, just took another big blow. According to the Spanish consumer association OCU, today’s ruling calls into question the independence of the judiciary vis-á-vis the banking sector while creating a climate of acute legal uncertainty. “Today the banks won and consumers and the rest of society lost,” it lamented.
Given Spain’s Supreme Court’s consistent, unabashed advocacy of the banking industry’s interests, perhaps the biggest surprise in all this legal fiasco is not that it has overturned a rare ruling in favor of bank customers that could have set the sector back billions, but rather that it even produced the ruling in the first place. By Don Quijones.
Luxury housing in London – which is nearly all of central London – is not in good shape, even as new high-end towers continue to flood the market. Read…. “Posh Ghost Towers”: Gloom Spreads Over London Housing Market as High End Freezes Up
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I don’t know about you guys, but this reaffirms my faith in money, so to speak.
Not so sure about Spanish jurisprudence (sorta like the oft discussed, never seen tooth fairy), or what ever the hell happened behind closed doors, but yea, money!
28 judges? Is there anybody in the country who ISN’T on the Supreme Court?
Look, let’s be realistic. We have a multiple simultaneous problems going on here:
1) Ain’t nobody in Spain ever gonna pay anybody back a loan. Just not going to happen.
2) An entire industry of excruciatingly incompetent but well-dressed & massively self-important “bankers” have been pushed almost beyond human endurance for over two weeks – they are exhausted. The judges damn near took all the bank money before the bankers could. This was a very close call.
3) Give everybody a free house right now. Just give it to them, wipe the slate clean of lawsuits, then slowly give the “mortgage lending” thing another try. We survived the inquisition, we’ll get thru mortgage lending (which, to be clear, in no way implies actual mortgage re-payment).
Extra credit question: Why does the Spanish Supreme Court have more judges than the average cheap-ass circus has clowns??
The problem with Spain is not the incompetence (real or otherwise) of her judiciary nor the corruption and incompetence of the banking sector.
The problem with Spain is the country as a whole has become overdependent on the real estate sector, and when a sector, any sector, of the economy becomes as important as real estate is in Spain no sacrifice is seen as too small to keep it going. Including making the country’s most august judicial body look like incompetent bumbling amateurs.
Spain faces a common problem in Europe: too much rides on a sector of the economy which faces major challenges. Among these major challenges are the contraction of mortgage originations: at the top of the real estate bubble 1.0 in 2007-2008, Spain had an average of 125,000 monthly mortgage originations. Now they struggle to hit 30,000/month, a number deemed absolutely vital to keep the bloated Spainish real estate and construction industries afloat, and that’s after employing every trick in the book, including the return of the 100% and no money down mortgages.
Spain is an aging, slowly depopulating country, a country that should be slowly downsizing and evolve to meet new challenges, taking the opportunity to liquidate failed investments over a decade old and allow the most corrupt politicians, bankers and real estate crooks to quietly disappear into the night to avoid embarrassing trials nobody really wants.
Instead she keeps on building houses nobody really wants to buy (too expensive for what they are due to extremely high stocks) and employing every trick in the book to keep the party going another day.
In Spain I was told real estate speculators are “tiburones”, sharks, because they need to keep swimming to avoid sinking to the bottom and being crushed by water pressure: in this case they need to keep on building rows upon rows of useless houses in the middle of nowhere because they cannot do anything else. Downsizing is not an option for them, the banks and local politicians behind them and their enablers in Madrid that need something to brag about during EC meetings.
Ok; you did a better job of explain it than I did.
I believe countries that behave like clowns (doesn’t mean they can’t still cause massive damage) should get treated as such. Your well-tempered post was an insightful root-cause analysis.
The answer to your question is in the question itself: The Spanish Supreme Court is not your average cheap-ass circus. One suspects that you already knew this…
Hi DQ, hope you’re well. In light of Unicredit taking a 850 million euro hit ref Turkey today, are we going to be seeing a hit on the Spanish Banks who are also exposed reference Turkey? Regards Steve
Interesting law you have in Spain. I wasn’t aware that the courts were required to take into account the economic impacts of their rulings.
yeah we don’t do that in America
So you got couple examples of obviously money-distorted Supreme Court rulings?
Its not law its the last wall of dictatorship
Hi everyone, especially D Q.
Now everyone sing along…….E VIVA ESPANA….it is entertaining after all.
The deep state works in mysterious ways. It’s like the deep state libertarian judges in the US who gave us Eminent Domain. Corporate libertarians. Six gun on their hip and a host of corporate subsidies in their other hand. Including tax cuts. What’s good for GM is no longer good for Apple, since all those blue collar jobs went overseas. It’s fun to rail about the stupidity of voters (who don’t appoint these judges anyway) but if there is a run on the bank whose ox gets gored? Everybody, so let’s pretend we voted for the populist who is really out for themselves, because we know the deep state will do the heavy lifting.