Kicking the can down the road... until the road ends

I wanted to write something more about the worsening crisis in Spain. I was behind on my reading of (Cathy O'Neal) mathbabe's blog when I came across her blog entry and has left me pretty much without arguments to add to the discussion. I quote her for the reader's convenience and pick up where she left off:

[...] Currently the worst example of this method is in Spain, where the banks are finding it politically impossible to admit their losses. [...]

What are the chances that this method of delay and pray will work for Spain? With an enormous housing bubble and 24% unemployment, not good. Most of the bad loans that have been extended after non-payment are housing market related. Half of the lenders are zombie, which means insolvent but still technically open for business. Essentially the numbers are just too high and now everybody knows it (see this Bloomberg article for the low-down on Spain).

So what should Spain be doing?
I like to point to the example of Iceland, which admitted its debts early on (although it has to be admitted they didn’t have much of a choice), defaulted on a bunch of international debt, bailed out their citizens from onerous home debt, and is recovering nicely (see this Bloomberg article for more on Iceland).

Oh, and let me add that they (Iceland) are indicting and jailing the bankers who got them into the mess, to the tune of 200 indictments. [...]

Unfortunately, it would be tough for Spain to repeat that act- it depended on the fact that Iceland has control over its economic choices, but Spain is part of the Eurozone and as such is embedded in a huge network of agreements and debts and currency with the other Eurozone nations.

In some sense, Spain is being forced into the zombie bank situation by a lack of options. Unless I’m missing something – would love to be wrong!

You are not wrong mathbabe. Actually Spanish politicians put into practice the centuries old tradition of the picaresque novel and tried to do some euro printing on their own. How? By injecting newly issued sovereign debt into Bankia's balance sheet. In this way, Bankia could go to the ECB and take more credit, and kick the can down the road. Draghi is not a fool and called their bluff the next day. Big slap on the face. Now Zerohedge is all over Bankia.

The Spanish housing bubble has not corrected itself as banks make up their balance sheets, and with the help of some more credit, merging with regional public saving banks rich in customers' current accounts, IPO and government bailouts now and then, they have been able to avoid asset depreciation. However, problems keep piling up and Spanish politicians keep thinking in terms of the housing market that brought (unreal) prosperity, refusing to take hard action. Keep calm and go on. Everything is paid for with austerity measures and tax raises that affect the productive layer of the Spanish society, sending the SMB to the abyss, which reduced the capacity of raising taxes, increases unemployment and drags people into poverty, which in turn reduces people capacity to buy a house. This will eventually crash the Spanish housing market. However, no one will be able to afford a house because, by then, the government will confiscate private savings (freezing accounts, or exiting the euro).

There will be much more pain in Spain. I would like to teach politicians that houses built for workers in a place with no jobs are worth the numbers of jobs in the place: nada. Finally, here is Biderman dealing with this topic (looks like this delay and pray is becoming a trending topic).

The ball is on the Spanish people's roof. They can choose to begin to understand, or they can choose to go on watching soccer.