The limits of patriotism are now on display in the case of Bankia, the troubled Spanish bank.
While the U.S. may have the dubious distinction of hosting the most famous housing bust in recent times, it had plenty of company from other developed countries along the way.
The key difference between America’s housing bubble and Spain’s? U.S. housing prices have already fallen tremendously. On the hand many analysts say that Spain’s housing market has much further to fall. (See this and this.) And that doesn’t even take into consideration the effect of lenders offloading foreclosed homes onto the market, which hasn’t started yet.
Enter Bankia. It was born in 2010 out of the merger of seven Spanish banks, a few of whom were in deep trouble as a result of their exposure to property loans. Then some observers questioned whether Bankia’s creation was just a delay tactic on the road to a more costly, unavoidable outcome. Would the €4.5 billion it borrowed from Spain’s Fund for Orderly Bank Restructuring (FROB) prove to be just a drop in a leaky bucket?
Yes, is the unfortunate answer. Bankia, whose €52 billion exposure makes it the largest real estate lender in Spain, will see the €4.5 billion FROB loan converted to common equity. This means that the government — contrary to earlier promises it made to the Spanish public — will take a direct shareholding in the bank. Asking taxpayers to serve as the ultimate backstop is tricky, unpopular but not entirely unexpected. Welcome to the club, say the UK, Ireland, Switzerland and, of course, the United States.
No, the more delicate issue is the fact that Bankia — with strong government support — sold common shares to the public during an IPO last July. “There is a lot riding on this IPO,” is what the prime minister at the time, José Luis Rodríguez Zapatero, reportedly said. Indeed, the IPO was heavily marketed to retail investors in the country who took more than half of the offering “following a wide-ranging newspaper and television campaign urging Spaniards to invest in the ‘best of the new banks.’” Here’s more from an anonymous Spanish banking source, as reported by Reuters:
“The IPO [which was deeply discounted to begin with] went ahead because of national interest and every Spanish bank that bought shares did so knowing that there were problems of viability and that the share did not have much room to climb.”
I think this guy might have a great future ahead of him as a prospectus writer. But seriously, will the average José will be as philosophical, given the shares’ recent performance?
Since last year’s IPO there has been a change in government. Zapatero’s leftist Socialists lost out to Mariano Rajoy’s center-right People’s Party last November. It will be interesting to see whether Spaniards will take account of this or whether they will still feel hard done by a political establishment that served as Bankia’s booster.
There’s a valuable lesson to be drawn from this whole episode, something that’s been proven time and again: patriotism is a fuel, a political force that can be used to meet economic ends. The eurozone is an economic experiment that’s flirting with disaster largely because of a lack of political will. A true united states of Europe — with a true European treasury issuing truly European bonds with joint and several liability — would put an end to the eurozone crisis at once. But politicians cannot make this happen until a majority of their constituents consider themselves to be Europeans first, and then German / Dutch / Italian, etc. second. Such widespread feelings of patriotism for Europe don’t seem to exist — and probably can’t exist without some sort of astroturf.