Is the bailout to Spanish banks a victory? No this is an odious perversion of reality

The initial €100 billion bank bailout for Spanish banks has been portrayed as a "victory" in an effort to obfuscate and hide the true dimension of the crisis. The economic argument goes that banks will now be better capitalized and thus have the comfort to supply credit on to the real economy; an essential part of invigorating economic activity. The more sophisticated analysts might even say that this is an economic blessing for the Spaniards, because of the magical "money multiplier" that will see banks creating exponentially more billions of output from this infusion of funds.

Plausible as this account might be, it has to be rejected on many levels. It must be made clear that the primary reason Spain is offered this bailout in such a clumsy, ad hoc fashion is to protect it from a possible "accident" in Greece that would reverberate across the eurozone, tearing apart the crippled Spanish banking system, within a very short period of time. In particular the fear is that if SYRIZA wins the elections and their anti-troika oratory is brought into concrete political action, then a Grexit is the most likely outcome, by means of cutting Greece from the TARGET2 payment mechanism; and Grexit will cause a domino of cascading effects that will eventually bring down much of the euro edifice, including Spanish banks. The bailout to the Spanish banks is but a buffer, that will temporarily shield Spain from contagion.

To put it bluntly it is an indirect way of saying to SYRIZA that the Eurozone can live without Greece, in case a Greek government does not want to abide by the rules it agreed to in two memoranda (the two bailouts - why did they actually agree is another issue). The bailout to Spanish banks is certainly not a solution to the crisis in Spain nor does it cover the full amount of funds that will ultimately be required to fill in those black holes that were created during the years of the cheap credit bonanza (assuming of course that the self-defeating mentality of bailouts does not change and thus all toxic debts are not liquidated).

More so, Spanish banks are being supplied with capital so that their capital adequacy may appear artificially improved in the upcoming "stress tests" of the European Banking Authority. After all it would be embarrassing to come up with results that would prove the naivety of EU policy-makers in asking from banks to raise their capital ratios amidst such a crisis.

Yet the erroneousness of this argument that depicts the bailout as a victory cuts far deeper. For it completely omits the incentives banks will have in making use of those newly acquired funds, as for example buying German bonds in expectance of higher returns in case the eurozone collapses. In other words, why didn't similar operations have the same benign effects? Why didn't the LTRO for instance, which was ten times greater than this "puny" bailout, have the effect of supplying credit to the real economy? Why did all the money end up in either overnight deposits at the ECB or in sovereign bonds? What is it that makes this particular bailout intrinsically different from the mumbo jumbo of such interventions since the beginning of the crisis? The answer is rather simple: a solvency crisis is treated as if it were a liquidity crisis - and this has proven disastrous thus far, for the underlying malignancies of the system have all been preserved.

Now on to the politics. I recall that in 2010, the Greek government of Mr Papandreou had its own "victories". The Greek Minister of Finance used similar triumphant rhetoric to convince everyone, in vain, that the bailout would bring Greece back into the bond markets as early as 2012; when today's reality shows that this will not happen before 2020, under an optimistic scenario. The mountainous heap of absurdities peddled by the Greek government and the troika officials (EU-ECB-IMF) in their efforts to justify the unjustifiable, will go down in history as a great example of political humbuggery, whereby a political class attempted to present its support to those interests that are interwoven with the state apparatus, as a blessing for the people and for democracy. The only victory we had in Greece over the last two years, was that of populism over reason, of intrusive taxation over social justice, of cronyism over meritocracy, and of an omnipotent government over society, whereby the 'troika' falls within the definition of 'government'.

Today we see again the same theatre of the absurd taking center stage in Madrid. Mr Rajoy's government tries to present an initial €100 billion bank bailout that will fall on the shoulders of every Spanish (and European) taxpayer, more or less as a cheerful event.

The hypocrisy of Mr Rajoy's government is the most odious perversion of reality one could ever imagine. In the end though, this might indeed be a genuine victory, only the victors happen to be those "institutional investors" who trade zillions via supercomputers, detached from the situation in the real world; while the losers happen to be those millions of "dupes" who are called to cast their vote every four years, so that such victories may be brought home more often. Whoever approves of all this is either an ignoramus or an apologist of a manifestly unjust and ineffective set of policies.

Enjoy your victory and rest assured that there is much glory coming your way since this bailout might be added to the national debt, potentially up to 20% of GDP, bringing Spain's fiscal finances into an even more precarious position. The trophy in such victories is called "austerity", it is the prize the three bailed-out countries received, featuring horizontal fiscal cuts and innumerable tax hikes in the midst of a disintegrating economy. Cheers!

Picture credit: Wikipedia

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