The new Spanish cabinet has entered directly to reform the pending issues of the Spanish Economy, like the Labor Market Regulation. Unfortunately, with regard to the Financial System is making the same mistakes of the previous one but at a larger scale.
Capacity Adjustment: The Spanish Government recently elected has done the same mistakes than the previous one: a Political Reform instead of a Profound Adjustment opting by mergers and acquisitions financially backed by the State instead of isolating the bad banks (Cajas) that are Regional Governments Owned Banks.
As you can see in the chart below, the Sector has reduced employment and offices by a significant number but it is still far from the levels previous to de financial bubble, 2000-2002. May be in two years it will be finish when 5.000 offices close and 20.000 employees be fired.
The sector started a modernization for a business ala Far Fest to a XXI Century retail banking industry giving it an absolute competitive advantage unbeatable by anyone in the World. As a result the employment function is very stable and highly correlated to the number of offices, as you can see in the chart below.
With such a competitive strength the Sector was ready in 2004 for one of the biggest Financial Bubbles ever seen that was mainly canalize in to the real state sector, with credit growing some years over 20% or three times the growth of the nominal GDP as you can see in the chart below.
It is certainly an anomaly that de Bank of Spain, one of the Few of the Euro area that has never been under the diktat of a invasion military force and that had an excellent record in solving other Spanish Financial Crisis over more than a Century in a country with very serious economic limitations and political crisis, has done such a bad work in the last decade. Well, it could get worse.
The Systemic Damage of Such a Bad Policy: with the Real State Bubble Bust permitted or even incentivized by the Bank of Spain authorities the whole economy became dependant of such madness and now that the impossible dream is over, the private distressed assets (state loans are another mess not included) have achieved a level of 7.6% (link to the last data) of total in a ballistic way and close to 150.000 millions of Euros or 15% of GDP, as you can see in the chart below:
Deleveraging by Default: it seems to be the path for the Spanish Economy as the Government is unable the orient it to make the economy grow healthy, or simply because attends particular interests instead of working for the Common Wealth as it is its duty. That is way many of this loans that are partially recoverable will follow the bad trend (—) instead of the ex post one (—).
The Need for growth: the chart below shows how the business clients are close to default with independence of the economic cycle in an exponential trend, while families follow the cycle and will grow again with the coming second dip. It will occur until the country achieves a surplus in its current account as we explained in the following link: the Spanish Monetary Nightmare. At least the pending Labor Market Reform, if approved, will help to avoid default the business clients in their balance adjustment.
The Equity Damage and the Race for Fresh Capital: the Spanish Establishment is been kicking the can down the road since the beginning of the Crisis in 2,008, and now with another bad program The Plan de Guindos Plan 2.0 that does not attend the liquidity bottle neck of the Spanish Economy (its Structural Current Account). The Spanish Financial Sector have successfully raised enough capital (see chart below) keeping the Equity Exposure to Bad Loans slightly over 60% by now partially thanks to be backed by the State, the thing is what will happen when the Spanish State finances be exhausted with the predictable lack of growth and monopolistic sector design by De Gindos Plan 2.0 that will bring 12 systemic gigantic institutions.
Instead of isolating the risk, cleaning the financial balances and the responsibilities of the mismanagement, “we” have opted by a dark behind the curtains distribution of market share among the main actors of the Economy. Soon the head of the disaster will be removed and all indicates that another pure representative of the ECB Cabal, the Masters of the Crisis, will be in charge of the of the Bank of Spain promising they will pursuit in the same wrong path that hasn’t work at all since 2,008. Does anyone thinks that doing the same will get a different result? Fools!
This article is a resume of a larger Report and Presentation.
As always, you can click the chart for a better resolution and details.
© Luis Riestra Delgado 12/2/2.012.