Friendly Fascism, Corruption and Bubbles. How Spanish banks survived the crash of 2008.

This article gives a short history of fascism and corruption in Spain before describing the current financial problems and their relationship with property and finance.

“Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.”

Spain is attracting a great deal of news coverage for all the right reasons lately, but the Spanish people have suffered enough.

It has a recently re-instated monarchy, On 22 November 1975, two days after fascist dictator General Francisco Franco’s death, the Bourbon heir Juan Carlos was designated King according to the law of succession promulgated by Franco. In 1969, when Franco named Juan Carlos as the next head of state, Spain had had no monarch for 38 years.

It has a King who,  as head of the Spanish “branch” of the World Wildlife Fund, thinks it appropriate to holiday in Botswana shooting elephants. That’s the King on the right (ahem)

The king’s daughter, la Infanta Christina Federica Victoria Antonia,  is married to Inaki Undangarin, Duke of Palma de Mallorca, who is currently facing charges of embezzlement of millions of euros.

It has a justice system in tatters, the Supreme Court suspended fellow Judge Baltasar Garzon from practicing for 11 years after investigating so called irregularities in Garzon’s investigation into wide scale corruption within the conservative Partido Popular. Up to 70 senior members were being investigated.

Supreme Court Chief Justice Carlos Dívar on Thursday resigned under pressure for charging 32 long weekend trips to Marbella and other Spanish destinations to the judiciary.

Carlos Divar had bi partisan support when appointed in 2008, the only candidate acceptable to the PP because of his “low profile”. This followed the appointments to the supreme court initiated by Jose Louis Aznar, ex- prime minister of Spain from 1996 – 2004. Aznar, now a very prominent member of Rupert Murdoch’s  News Ltd board, was a founder member of the “coalition of the willing” leading the “oil wars”, even before John Howard. The only natural resources Spain has is a small amount of coal in Asturia.

Aznar was “scholared” in politics by Manuel Fraga.  From 1951, Fraga served in various posts in the Franco regime, including minister for information and tourism.  He took part in the Transition (restoration of the Monarchy),  and formed the conservative People’s Alliance (AP), the precursor to the Popular Party (PP).

Fraga was known as a heavy-handed politician,  the drastic measures he took as chief of state security during the first days of the Spanish transition to democracy deeply damaged his popularity. The phrase “¡La calle es mía!” (“The streets are mine!”) was attributed to him. This phrase was his answer to complaints of police repression of street protests. He claimed that the streets did not belong to “people” but to the State.    

A certain sexual liberality in films was popularly summarized in the expression Con Fraga hasta la braga (“With Fraga [you can see] even the panties”).

Manuel Fraga with Gen Franco, “El Caudillo”, ‘the leader’.

Appointing Aznar as head of the Partido Popular (PP) in 1989, Fraga  duly became President of the PP.  Fraga was known as a “social liberal” relaxing censorship laws (despite the severe lobbying of the Catholic Church) and  finished his political career as Franco did, in office. He died in January 2012 serving as Spain’s ambassador to the European Union.

The “lineage”  is further continued into the present day when Aznar’s “puppet”, here Aznar is looking for the hole in the back of Rajoy’s head.

Manuel Rajoy became head of the PP in 2004 after Aznar was dumped. (Rajoy is currently prime minister). Aznars wife is Mayor of Madrid, Spain’s largest city and the seat of government.

Nothing has yet been mentioned of the fascist dictatorship, even less is currently spoken about the Second Spanish Republic from 1931 -1939, when Franco’s victory forced the Republican government to exile in Mexico, it disbanded only after Franco’s death. If a cursory glance is cast, striking similarities can be seen to current events and recurring themes played out,  separated by time but very relevant to the history of Spain..

Spain’s economy collapsed after the Wall St crash in 1930. General Primo’s 12 year dictatorship ended when the monarchy and people (who hated his brutal era) lost confidence in the government and elections were held that produced a republican and very anti-catholic majority. The unification of 1851 under the Bourbon (French) monarchy was being undone as King Alphonso XIII abdicated and Catalunya and the Basque became independent regions.

General Franco earned his stripes and became known as “the butcher of Asturias” after his brutal surpression of the miners strike in 1933.

In January 1936 new elections were called which confirmed the socialist alliance as the dominant majority, but a series of assasinations and fascist/socialist violence (this is when Hitler and Mussolini were warming up), saw the invasion of Spain by Franco’s North African army in July 1936. 3 years later the civil war was won, General Franco, supported heavily by the catholic church, led a rebellion which systematically crushed the most progressive social and political reforms of the 20th century.

George Orwell’s  “Homage to Catalonia” is a wonderful journey through the rag tag war.

A full length film “Living Utopia – Anarchism in Spain” (subtitled) – details this tumultuous period.

It tells and shows an impoverished, hard- working intelligent, society realising the truths of brutal fascism. With original footage the documentary explains the strategies behind one of the most progressive governments of the 20th century.

Franco’s victory in 1939 allowed a period of massive reprisals aided by the catholic church. Claiming neutrality gave licence to untold mass murder under the cover of world war 2, including Franco asking Hitler’s Luftwaffe to bomb and destroy Guernica in the Basque region. A bonus for Franco was the post war escape from attention afforded many fascists of the time because Franco was now actively butchering the communist leftovers – much to the approval of America and the U.K.

The random brutality and reprisals by the Falange continued right up to Franco’s death, papered over with the re installation and the “transition to democracy” that still exists. Many of the prison camps and detention centres remained into the nineties.  It was  not until the 2004 dumping of Aznar and election of socialist Zapatero that the statues of General Franco were removed from all the major plazas and intersections  around Barcelona.

The fascist Falange lives on in Spain. They recently brought a summons against Baltasar Garzon for forcing the recovery of over 100,000 bodies which still remain in mass graves throughout the country. Manuel Rajoy has stopped any federal assistance to the searches. There is a group called the Commission of Historic Memory Recovery    which flounders to bring about what is granted in Australia on an “as needs” basis, a human right proudly supported by the government, – to re associate families with their dead/missing relatives. They are not even buried in a foreign country for God’s sake. (4)

The Catholic Church offers no support, preferring to denigrate homosexuality and force the government to reverse abortion rights, access to the morning after pill, and gay marriage. Their, (Rajoy’s PP government)  crackdown on public gatherings makes further fascist tendencies obvious.

” Interior Minister Jorge Fernández gave more details: peaceful resistance will be deemed a form of illegal undermining of authority, punishable with one to three years in jail; the punishment for civil disobedience, which is currently six months to one year in jail, will be increased to two to three years”.

The corruption in the judiciary and government is not a one sided affair, the first socialist government since Franco was ousted because of corruption, and Garzon had prosecuted both socialist, Basque separatist and conservative even handedly as corruption in Spain is endemic, apolitical and established in almost every sector.

The banking industry is yet another industry rife with corruption as the servant  of the real estate/development  industry, and  is a prime example of the rampant corruption which extends into every one of the three levels of Spanish government – Federal,  Regional (autonomous) and local.  All Spanish bank board approvals are political appointments, so builders, teachers, cleaners earn board fees for unknowingly approving sub prime loans and not assessing budgets.

Corrupt regional governments have been allowed to finance self agrandisment projects worth hundreds of billions of dollars with help from the E.U. The country was 3rd world when Franco died, just starting a “package holiday” tourist boom initiated by Manuel Fraga in the 60’s, which virtually destroyed the Mediterranean coastline. Jose Louis Aznar’s neo conservative economics saw Spain BOOM.  The property market rose exponentially from 1996 until in a repeat of the Wall St crash of 1929,  Wall St crashed in 2008, but the Spanish banks survived until 2012.

European money providing infrastructure projects such as high speed rail, air ports and solar thermal power generation, saw Spain’s investment levels reach record highs and become the center for European tourism and holiday home acquisition. During the Aznar years regional governments such as Valencia were given cart blanch to go for the tourist dollar. An airport was built at Castellon at a cost of 200 million euros with a 300,000 euro statue of the regional governor at the airport entry. Although completed in 2010 a license  to operate has not been issued and it has been nelatedly discovered that the runway is too narrow to allow international flights to turn round.

There are now 48 airports in Spain, double the number in Germany, only 11 make a profit.

Many reports detail the 1,000,000 empty homes in Spain as well as real estate which is virtually “unsellable” caused by the pre 2008 bubble; http://www.bloomberg.com/news/2011-11-17/spain-s-unsellable-real-estate-assets-threaten-smaller-banks.html

Exactly the same thing happened in the U.S., Iceland, England and more particularly, Ireland (see below – McCreevy),  but it has taken 4 years for the true picture to be known in Spain.

It has taken 7 months of lies to hide the true extent of Spain’s bankruptcy and finally ask the E.U. for a 100 million euros “bail out”, meanwhile Spanish bonds have been downgraded to junk as the taxpayer further bears the brunt of sovereign debt totally caused by corruption, speculation, belief in infinite growth and a destruction of the environment.

Socially the results have been disastrous. 25% unemployment, 50% 18 – 25 year unemployment, evictions, general strikes, indefinite miner’s strike in Asturias causing flashbacks to 1933 and Franco’s repression.

A veil of secrecy has always been part of the Monarchic/fascist/conservative Spanish governments, which fawn on secrecy, protocol and tradition, and assumes an undue respect. Those that experienced the hardships and brutality of the fascist regime, and the prosperity that followed to make Spain the 4th largest economy in Europe and the 10th largest in the world, are fearful of a return to a brutal past which has never been discussed during the “transition to democracy”, the church is very powerful socially and has easy purchase within the PP.

Time and again corrupt regional governments in Marbella, Valencia, the Belearic Isles, Catalonia and Gallacia were returned in the hope they would keep the “good times rolling”, never has the average Spaniard experienced such wealth creation.  It is now common daily news reporting to hear of a mayor or regional governor in court facing corruption charges, and a recent (June) El Pais article asks

“Is something rotten in the state of Spain”.

The people voted for Rajoy and the PP knowing that election day was the anniversary of Franco’s death, and a return to “austerity” was already foreshadowed by Rajoy who was keen to participate in the friendly fascism underway in the Goldman Sachs-ing of Europe. His answer to the 1000’s of houses built and completed illegally on land not zoned for development, is legalization and further destruction of coastal environment. His answer to virtually the whole of the building industry being cast into unemployment, was to enforce evictions. His answer to the massive public outcry about systemic corruption is to ban peaceful demonstration.

Rajoy governs unilaterally, secretly. There has been no parliamentary debate about the “bail out”.

His answer to unemployment and the recession, that Spain seems doomed to endure for another 10 years, is to create another bubble, this one courtesy of Las Vegas and Macau gambling multi billionaire Sheldon Adelston and “Euro Vegas”  – 6 casinos, thousands of hotel rooms and 18 BILLION euros worth of investment which would reportedly halve Madrid or Barcelona’s unemployment rate. The respective governments are falling over themselves to the point of embarrasment, to attract Euro Vegas. This would add to the already established 30 casinos currently operating in Spain.

THE LEGACY.

A very insightful book has recently been authored by the son of the head of the Republic in Exile post Franco, Nicholas Sanchez-Albornoz called “Prisons and Exiles”, revisiting the Franco when the police caught up with him and his colleagues in the anti-Franco fight.  The escape of Sánchez-Albornoz and his fellow prisoner Manuel Lamana from the slave labor practiced at Cuelgamuros near Madrid in 1948 was one of the legends that most damaged Franco.

The Franco regime never conceived of peaceful co-existence among Spaniards without political exile, the period from 1939 to 1942 in which, according to reports from the time, more than 100,000 people were executed. But  Sanchez-Albornoz account is not from that time, it “begins in 1947, and I am sure there were still firing squads then because I lived through it. The executions lasted until Julián Grimau in 1962, Franco kept killing after the war.”

Sánchez-Albornoz  sees the whole 40 year period as ;  “corrupt. Franco’s authority rested on two elements: death and punishment, and corruption  . . . . 

Q./  The regime ended. But when your father returned from exile in 1976, then Interior Minister Manuel Fraga Iribarne prohibited a formal dinner in his honor. So, the regime was still there.

A./  And it is still here today. There is a de facto group, which stands for everything that fuels that dark side of a segment of the Spanish population.”

Q. How do you see this current period?

A. There is a global economic crisis led by the financial system and its abuses, which in the case of Spain has been worsened by a dreadful economic policy created by the PP in its last government (Aznar), to give free reign to the real estate sector, which resulted in a certain level of euphoria at the time. And Zapatero didn’t put a stop to it; he didn’t know how to burst the bubble. What is alarming in the current situation is the level of improvisation. There is a return to certain Francoist roots in society, and that is worrying. A very unpleasant Spain is surfacing. “   http://elpais.com/elpais/2012/05/14/inenglish/1336996949_106345.html

The remnants of fascist Spain can most easily be seen at peaceful public demonstrations. Tear gas, pepper spray and rubber bullets are a first response, now demonstrations are being made illegal. https://awayfromitall.me/2012/04/12/spain-converts-passive-resistance-into-a-crime/

 

HOW DID SPAIN’S BANKS SURVIVE THE 2008 CRASH ? –                      BASICALLY, ENDOGENOUS CORRUPTION.

The Zapatero socialist government introduced many reforms after 2004, including his most popular one of withdrawing troops from Iraq as soon as elected,  but weakly caved into a lessaix faire ignorance of the bubble. It has recently been discovered that when the shit hit the fan, Spain’s central bank, the Bank of Spain, had, in the timeless Spanish tradition been cooking the books.

The full extent of indebtedness was only hinted at when E.U. contagion was considered. Greece’s debt palls into insignificance when compared to the level of debt owed by the spanish real estate sector, anything up to half the money the European Financial Stability fund has on its books, just to re-capitalise the Spanish banks, now to be re classified as “sovereign debt”.

Both socialist and conservative governments have been shamefully responsible for dereliction of duty with the burden of debt, and,  in true Goldman Sachs fashion, transferred the debt from the private to the public sector. Rajoy’s PP government has been in complete naïve denial, and “cover up mode”,  and lied as much as he could to save face, to just lick the can down the road until after summer and the tourists have gone. The full debt is still not known and Rajoy was refusing to call for assistance as recently as the end of May.  He is now openly criticized in all European media.

Only 12 months ago he oversaw the privatization of Bankia, Spain’s 4th largest bank. The share float began at 3.69 euros and is now valued at 1 euro.

Bankia’s end of year 2011 report declared a 40 million + euro profit which on independent audit was revealed to be a 3.3 billion euro LOSS. Bankia has now asked for a 19 BILLION euro bail out. The total “immediate” bail out for the banking sector is said to be 62 BILLION euros, this is excluding the BoS as it would not have enough time to complete the audit until September as “too many staff would be on leave over summer”.

The following shocking report from the Raul Ilargi Meijer, at the automatic earth; http://theautomaticearth.org/Finance/spanish-cook-books.html

“The Bank of Spain says 8.72% of loans had gone bad by April . There’s no doubt that’s far too low a number, once more. In Ireland, it eventually added up to 24%. . . It would be irresponsibly foolish to take the Bank of Spain at its word, since every Spanish institution thus far has tried to cover up bad news. Just two weeks ago, PM Mariano Rajoy still insisted no bailout of any sort was needed. And look now.

Spanish house prices fell at the sharpest pace since current records began in the first quarter, data showed on Thursday, deepening a property market slump and serving up more bad news for the country’s battered banks.

Prices dropped 12.6 percent year on year, national statistics institute INE said. The fall was the biggest since the data series began in 2007, easily beating the previous trough of 7.7 percent in the second quarter of 2009. Spain’s banks were left high and dry after a housing boom collapsed four years ago, saddled with billions of euros in bad debts related to the property sector, while sky-high unemployment has driven a sharp climb in unpaid loan rates.

The government said last weekend it will borrow up to €100 billion from Europe to help recapitalize the lenders, though many economists believe the aid will not be enough to avert a full sovereign bailout. With the banks struggling to stay afloat, loans for anyone wishing to buy a new home are declining rapidly, with mortgage lending suffering its largest fall in over six years in February. In a report earlier this month, the International Monetary Fund (IMF) said Spanish house prices could drop by almost 20 percent this year under an adverse scenario.

That’s one side of the sovereign and bank trouble: bad loans. Here’s the other one. Amanda Cooper covers the problems with the Spanish regions:

The debt pile for the country’s 17 autonomous regions grew to €145.1 billion, or equal to 13.5% of gross domestic product, in the first three months of the year, up from €140.1 billion at the end of last year.

Regional liabilities will only rise further as Spain grapples with a recession and a shrinking tax base that have helped make the country the focus of the euro zone debt crisis. The regions have in recent years financed their deficits by delaying payments to providers such as street sweepers and medical equipment suppliers.

Earlier this year, the government extended €27 billion in credit via the state credit agency, or ICO, to the regions for them to pay the mountains of bills owed to their suppliers. But raising more money for the regions through the ICO is not an option as the regions have exhausted its credit lines.

Worse still, Spain itself risks losing favor with investors. The benchmark 10-year sovereign is trading above the 7 percent level that is seen as unsustainable in the medium-term. “It’s impossible (for the regions) to issue bonds, even with the government guarantee from Spain … They would need to issue in the short term and I don’t think the market would appreciate another increase in the debt/GDP ratio of Spain when we are already close to 90 percent,” said Giansanti.

Spain’s sovereign debt as a percentage of GDP hit 72.1% at the end of the first quarter, and is expected to grow to 90%this year, largely due to the bank bailout.

But to really understand the scope of the problems, to see the perhaps biggest issue of all, we need to know, or at least try to find out, exactly how (un-)reliable the numbers are.

What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.

Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.

One of the more candid advocates of Spain’s approach was Charlie McCreevy, the EU’s commissioner for financial services from 2004 to 2010, who previously had been Ireland’s finance minister. During an April 2009 meeting of the monitoring board that oversees the International Accounting Standards Board’s trustees, McCreevy said he knew Spain’s banks were violating the board’s rules. This was fine with him, he said.

In a follow-up piece called How to Say ‘Deceptive Accounting’ in Spanish , Weil recounts a conversation at that International Accounting Standards Board meeting 3 years ago:

The discussion here is between Charlie McCreevy, then the EU’s commissioner for financial services, and Robert Glauber, one of the accounting board’s trustees. Glauber is a former chief executive officer of the National Association of Securities Dealers and teaches at Harvard’s Kennedy School of Government.

McCreevy, who at the time was the chief enforcer of EU laws affecting banking and markets, said he knew Spain’s banks were violating International Financial Reporting Standards — and that this was a good thing. Glauber was aghast.

• Glauber: Perhaps I misunderstood Commissioner McCreevy. I thought he said that the reason Spanish banks had been more successful than others in navigating the financial crisis was that he had permitted them to violate accounting standards. Was that right?

• McCreevy: I didn’t permit it, they just did it. But logically …

• Glauber: Well, you didn’t pursue them.

• McCreevy: We hadn’t arrived at the situation of bringing infringement proceedings against them, but logically, that’s what I should have done.

• Glauber: Well, I just … I believe in the U.S. where we’ve had banks that have had difficulties navigating the financial crisis, my own personal view is that they would not have been more successful had we allowed them — our regulators allowed them to violate accounting principles. I just don’t think that’s true, and I don’t know where the evidence is. In fact, markets work best when they have confidence in the numbers that institutions, businesses publish, not where they have no confidence in those numbers. And you can’t fool the markets. … So I don’t believe, whatever the reason is for the Spanish banks having navigated this crisis better, it wasn’t that you didn’t act to prevent them from violating accounting rules.

• McCreevy: They didn’t implement IFRS and our regulations said from the 1st January 2005 all publicly listed companies had to implement IFRS. The Spanish regulator did not do that and he survived this — his banks have survived this crisis better than anybody else to date.

• Glauber: I don’t mean to be criticizing you for acting or not acting, but I don’t think that’s the reason they survived better, that they failed to honor accounting rules.

• McCreevy: No, I’m making the point is that the rules did not allow the dynamic provisioning that the Spanish banks did, and the Spanish banking regulator insisted that they still have the dynamic provisioning. And they did so, but I strictly speaking should have taken action against them for doing this responsible set of actions. That’s the point I’m making is the ludicrousy in my view of some of these particular rules. The Spanish … and it’s worked pretty well for them.

So to sum up this way of thinking: The best system is one that lets banks hide their financial condition from the public. Barring that, it’s perfectly acceptable for banks to violate accounting standards, if that’s what it takes to navigate a crisis. The proof is that Spain’s banks survived the financial meltdown of 2008 better than most others.

Except now we know they didn’t. They merely postponed their reckoning, making it inevitably more expensive. Someday maybe the world’s leaders will learn that masking losses undermines investor confidence and makes crises worse. We can only hope they don’t manage to blow up the whole financial system first.

We know that Spain cooks its books. And we accept that because everyone else does the same thing. That will have to stop. (16).

It should also be noted that understating bank profits and losses is also a very effective way of hiding corruption, illegal payments and commissions. No-one within the Spanish finance sector could be trusted to produce accurate figures of total debt, surely a pre-requisite when assessing the size of a bail out.

“the losses for the Spanish banking sector could reach up to 270 billion euros” (17)

This does not include the audit of the Bank of Spain, which, if insisting in “cooky jar accounting” amongst Spain’s banks, must have been using the system itself.

This does not include the still increasing debt by regional governments of 150 BILLION euros.

The catholic festival of St Joan was held last night. A celebration of the solstice and the fire of summer. Firework displays by the Barcelona government were city wide, beginning at 9 pm and lasting way after 3 am. Bonfires were lit with the necessary safety crews in attendance, not a sign of austerity in site. Couldn’t the million odd euros that went up in smoke last night be better used ?

What is certain is that the real estate/development bubble has burst, and there are child- like attempts to re – start a bubble, any bubble,  by giving away whatever is needed to attract the Sheldon Adelston’s of the world (18), perhaps its time to launch the 3rd Republic.

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