Bankia Shares Still Falling

I know I should short Bankia shares, but not having traded open stock in ten years I'm too lazy to do it now.  They continue to fall, and the politics is mirroring Anglo.  The only difference this time is that Spain is so big, important, and relevant (unlike Ireland) that European leaders may once again revisit their comfort zone of double standards, moral hazard, and down-the-road-can-kicking and step in to articifially support the Spanish system.  At least until after French elections. Right?

I'll get my coat.

Is Spain "Turning a Corner"? (Of Course Not)

Meanwhile, in Madrid, things have got a distinctly Irish feel.  Spain's third largest bank Bankia was under pressure to raise funds, as investors saw it was too risky.  The State stepped in, taking a 45% stake.  "The Bank of Spain said Bankia and BFA, its parent company, had informed it that the conversion of €4.47bn of state aid in the bank into ordinary shares was "the most advisable option for strengthening the [bank's] financial soundness"."  OK, now where have we heard that before?

Well, way back in December 2008, the Irish Government decided to take a 75% stake in the country's third largest bank, Anglo Irish Bank, which was under pressure to raise funds.  "Dublin “will continue to reinforce the position of Anglo Irish and will make further capital available if required so that it remains a sound and viable institution,” the finance ministry said," injecting €1.5bn into the institution.

What happened next? Well, in Spain, Olli Rehn declared that the Spanish plan to manage the Bankia problem should dispel any doubts about the "stability of the Spanish banking sector."  In Ireland, the Commission approved the Irish government plan to recapitalise Anglo on January 14th 2009, but two days later, Finance Minister Brian Lenihan dropped another bombshell: "A €1.5bn (£1.34bn) recapitalisation package unveiled after a loan scandal at Anglo Irish is "not now the appropriate and effective means to secure its continued viability" and a full-scale nationalisation will be initiated," he said.  The hole was effectively too big for a partial nationalisation.  In Spain, there remains some uncertainty about the shortfall in Bankia.  As it was an amalgamation of lots of banks, hurriedly scooped together and floated in 2011, one suspects that there was some hope that any holes could be socialised across the new group.  In truth, no one really knows how deep the hole is in the Spanish Banking Sector.  Which was just like Ireland - the bank debt seemed manageable, but then got bigger, and bigger.

Today, Spanish Prime Minister Rajoy warned that Spain faced exile from the bond markets.  Ireland decided to withdraw from the bond markets in September 2010.  Ireland's decision was not theirs to make - they were priced out of the market, in the same way that the current trajectory of bond yields for Spanish sovereign debt is threatening to exclude Spain.  The banking system goes first. Private credit to the private banks becomes unattainable at reasonable rates, and so the government has to step in in order to prevent a banking sector collapse.  That nationalises an indeterminable amount of debt, or at least exposes the sovereign to the debt.  This is where Spain is now.  This is where Ireland found itself in early 2009.  We limped along for another eighteen months as the astonishing reality crept upon us, revelation by revelation, in one bank, then two, then three, then the systemic and cultural issues became evident.  Spain won't get 18 months, the markets are wise to the pattern.

I'm not worried about the Eurozone, I'm worried about the EU!

Oh, time. They say it's a great healer, but it also papers over the cracks.  The European Union project has been an outstanding success.  Building on common interests, of trade, movement, security and even threatening to break out into a unified force in Global Affairs in the last few years, Jean Monnet would be very pleased.  But time makes us forget.  We forget what brought us together in the first place.  We forget the wars, the horror.  We forget the divisiveness of nationalism, let alone ultra nationalism.  And so, while in good times all boats floated on the success of the Eurozone economy, in bad times it's every country for themselves, and the strongest will dominate the weak.

Germany has enjoyed extraordinary privilege in its membership of the Euro, through persistently low interest rates and a willing export market at fixed, favourable exchange rates.  The Eurozone's success depends in many respects on Germany, but it is also true that Germany's perpetuation of its own success is dependent on retaining those privileges.  In simple terms, Europe needs to learn that when good things happen, they should be shared.  And when bad things happen, they should also be shared.  That has not been the case.

In a sense it was easy for Monnet, Schumann, and all the rest of them to cede sovereignty and make huge leaps in integration in aftermath of an appalling and hugely destructive war.  Nationalism seemed empty, useless, meaningless in the face of what we had all done to ourselves, and to each other.  We have forgotten all that.  Our motivations have reverted to isolated self-interest, and short term politics.  This is not a recent phenomenon.  The failure of successive governments and EU administrations to drive deeper integration, to make multiculturalism a success, to play down national pride in favour of regional belonging, has been stark. Our education programmes have not been strong enough, our political leaders have not been wise enough, and it appears now inevitable that we will all pay a terrible collective price for out naivete.  Great states and countries are born of fire - the new Europe came so close to building a single, federal state, but everyone failed.  Maybe we shouldn't be too hard on ourselves, it's never been done before.  And perhaps there are lessons in it for future generations who might be brave enough to have a go once more.

I am not feeling happy this morning.