Could Spain "do a Cyprus" and raid Spanish bank accounts?

Last year I posted "Are Spanish bank accounts safe?" but its assessment of the risks is now out of date because of the crisis in Cyprus.

Could Spain also start confiscating money from bank deposits in the country?

Will Spanish bank customers be effectively be blocked from accessing their accounts or moving money in  a crisis?

Is the €100,000 deposit guarantee offered on Spanish banks safe?  It didn't count for much in Spain where even tiny accounts were raided by the government and are now locked.

The Spanish government have point-blank denied there is the remotest chance of this happening in Spain and there is certainly no need to panic.

On an optimistic reading of current events you would say that Spain has already sorted out its bank recapitalisation and, even if a further bailout were needed, would learn from the Cyprus episode and not take a slice of its citizens' cash to do it.

However the crisis is a stark reminder of three worrying points for anyone with Spanish assets:

- the Eurozone crisis is still very much unresolved and will keep coming back in nasty and unpredictable ways
- the real powers that be, such as the IMF and Germany, carry all the clout and will happily trample all over Spanish national interests when there is a risk to their money
- governments are getting desperate and no liberty is too sacred to be trampled on.

I never thought I would see a European country locking its people away from their own money, but its part of pattern of governments getting increasingly aggressive and intrusive in attempts to raise cash.  In Spain we have already seen the forced declaration of foreign assets which surely is the forerunner of more punitive taxes on them.

However some of the recent reports of Spain already planning a raid on deposits is alarmist (example - Cyprus copycats: NZ and Spain).  They refer to the "moderado" levy which is being introduced at 0% (!) initially but will rise to something like 0.1-0.2%.  The key point though is that this is a pre-announced tax on the banks themselves and not a preemptive raid on deposits of their customers.

Call me naive but I don't think the "moderado" and the Cyprus levy are comparable and there is little likelihood of it mutating into a serious government bank account attack.  Not to say that the government will not get their hands on their people's cash in other ways of course - ever higher taxes on spending and income or a big increase in the wealth tax that was brought back recently.

All in all though I would say it is unlikely that the Spanish government will "do a Cyprus".  Most likely nothing will happen so long as the government debt crisis doesn't start flashing red again.  If that happens, and I think it probably will because the Spanish economy can't survive the measures announced last year to cut the deficit, then all bets are off and the fears I spoke about in my original article may be realised.

From our website:  Autonomo Guide

Stimulus doesn't work. Just look at Spain

As the stimulus versus austerity debate rolls tiresomely on, it is a good time to reflect on what government action did for Spain's economy after the crisis hit four years ago.

Spanish unemployment hit 25% recently.  The government is bankrupt, the banking system bust and the economy is shrinking.  Only an ECB promise "to do all it takes" is preventing a slide toward default and chaos.

As with most Western countries the proximate cause of the crisis is the debt-fueled bubble that preceded it, with the property market at its core and low Euro interest rates enormously exacerbating the problem.

Unlike Brown's Britain, Spain did not compound the problem by running  a large government deficit during the boom years.  The Spanish government was running a surplus in 2007 and the public debt to GDP ratio was a respectable 36% so, according to Keynesian logic, the government was well-placed to rescue the economy from the effects of private sector deleveraging.

And the government has tried lots of stimulus in response to the crisis.  Between 2008 and 2010, before the austerity drive started, the government spent like a drunken sailor: national debt ballooned by more than €200 billion in two years (20% of GDP).

Super low interest rates sent mortgage costs tumbling and thus artificially boosted private incomes.  The government passed laws to allow people to defer their mortgage loans and escape foreclosures.  There were huge public works programmes and schemes to boost car sales (see Spanish car sale worst for 15 years).

If stimulus worked as expected these measures should have allowed the private sector to recover and allow the government to start withdrawing support and begin rebuilding its own finances.

But we are as far away as ever from a private sector recovery.  All those stimulus measures worked for a while but just postponed the day of reckoning.   Spain got no lasting momentum from those so-called boosts - they are just left with the debt.

Car sales are a perfect example of the futility of government action and the damage it can do in the name of stimulus.

Before the crisis hit Spanish car sales regularly topped 1m vehicles a year.  When the bubble burst predictably car sales crashed too, falling 18% in 2009.  The government responded with Plan RenoveE - a subsidy dressed up as a green initiative - and this programme did support increased sales while it ran.

But what good did it do?  Sales last month were 35,000, the lowest on record.  Year on year sales are down an incredible 37%.  The government is trying to revive the subsidy scheme even though it can ill-afford to and must know though that the only permanent effect will be to increase the national debt.

This is just one example.  The public work schemes helped some workers to stay in a job for a year or so but, now the money has run out and the government is cutting at all levels and raising taxes, the unemployment picture is worse than ever with no end in sight.

Arguably worst of all was the various policies to prop up the housing market.  Banks hid their losses for four years until the Bankia scandal showed just how close the whole system was to collapse (see Are Spanish bank accounts safe?).

Only then did the banks face up to their bad debts, begin liquidating and seeking new capital.  A few households might have escaped foreclosure for a time but the full force of "deleveraging" is now being felt and will be more severe than it would have been with an immediate clear out after the property boom ended.

Imagine if the Spanish government had adopted a different path in 2008: concentrated on economic reform instead of increasing public spending, cut out public sector waste, forced the banks to deal realistically with their bad debts and forsworn any quick fixes to help individual sectors.

Yes the immediate effects would have been drastic - a deeper recession, more foreclosures and probably worse public sector finances for a while.  But that was four years ago.  By now things would have bottomed out and there would be growth on the horizon instead of endless stagnation and self-defeating austerity.

Keynesians will read this and say it is the Euro that's done for Spain and it is unfair to blame government attempts to stimulate its way out of recession.  They are mostly wrong.

It is true that Eurozone membership has been a disaster for Spain but the damage was done by low interest rates during the boom not since (see Eurodoubters are being proved doubly right).  Since 2008 rates have mostly been set low to bail out Spanish debtors.  Spain does have an overvalued currency which is part of the problem but Spanish exports have actually been doing well, even now growing at double digit pace.  It is the efforts to end the recession with stimulus that have done the most damage.

When you see an American or British commentator trying to sell the benefits of government action to "fight" a weak economy, remember what has been done to Spain in the name of stimulus and reject them.




From our website: Changes to Spanish Tax Form 210

Spanish savers: government to the rescue?

Last week I wrote about the Spanish savers who are set to lose everything because they were sold preference shares in their banks which have subsequently gone bust - New fears over Spanish bank accounts.

I said that it was worrying that the government was not prepared to step in and help despite the fact that the policies were blatantly missold to the vast majority of retail investors who thought they were just deposits with lock in periods.

It seems like I may have jumped the gun and surprisingly underestimated the Spanish government on this one.  According to an article in the FT they are going to ensure that most small savers are repaid in some form.

The concession is complicated by the Memorandum of Understanding the Spanish government signed with the EU prior to receiving access to up to €100bn of bail out money for their financial institutions.  This envisages bank preference shareholders taking their losses in full and there are restrictions on what can be repaid e.g. no more than 10% more than the current market value of the shares.

Some of these shares trade at below 50% of face value so saver could still be taking a big hit.  However the outlook has definitely brightened for them and it slightly increases general confidence that the government will protect the retail depositor more generally whatever happens.  If it can afford to.

From the website:  Spanish tax form 210

New fears over Spanish bank accounts

A little while I wrote about the security of Spanish bank accounts in the midst of the rapidly worsening economic situation in Spain: Are Spanish Bank Accounts Safe?

The gist of the article was that although there are government guarantees for deposits up to €100,000 I wouldn't be too confident because, in a worse case scenario, the government might fail to honour the guarantee or even pay up in devalued pesetas.

The latest twist in the tail concerns savers who have lost their savings without any recourse to the government deposit insurance, because they have been sold preference shares in their bank.

These were sold as if they were just deposits with especially good rates of interest but they have turned out in fact to be risky securities which would not pay out at all if the bank went under.  That's exactly what has happened in some cases, especially the giant Bankia which had to be bailed out last month leaving "preferential shareholders", mostly innocent savers, wiped out.

I have read that there hundreds of thousands of these preference shares in private hands.  But if your money is in a proper bank account then you should still be able to claim on the government deposit insurance if your bank goes to the wall.

There has been no suggestion that the government will step into help preferential shareholders which does rather support my view that Spanish government bank deposit guarantees might not be honoured if things get really bad.  No wonder it is said that tens of billions have already been shipped out of the country.


From our website:  Changes to Spanish tax form 210

Are Spanish bank accounts safe?

MARCH '13 UPDATE:  I wrote this assessment in August 2012 and there have been some developments since.  On the plus side, the Eurozone crisis seemed to ease after the European Central Bank said it would do everything it took to backstop the weaker countries like Spain.  This has made Spanish banks look safer.

On the negative side now we have Cyprus where a Euro-area country has begun confiscating a % of people's deposits without warning and preventing them accessing their accounts.  Could that happen in Spain?  See Could Spain "do a Cyprus" and raid Spanish bank accounts? for the very latest.


The Telegraph recently ran an article entitled "Pain in Spain could spell trouble for expats" asking whether money deposited in Spanish banks was safe.

It's a good question if you live in Spain and have a current account with a local bank and also some or all of your savings in a deposit account.  Perhaps you bank with one of the big banks like Santander or BBVA or one of the cajas which are like building societies (but with less money!).

The article was prompted by a wave of downgrades of Spanish banks by S&P which followed a downgrade of the whole country to BBB+ status the previous week.

Even national giants Santander and BBVA were on the list of threatened banks although they still get a rating higher than the national one.

The article focused on the government deposit guarantee scheme which ensures you get €100,000 back from the government if your bank goes bust.  It suggested that you might want to review if you have assets more than this.  However that only partly answers the question in my view.  How good is the goverment guarantee?

Given that the Spanish government is also deep in a debt mire along with the country's financial institutions, it is unclear whether they have the financial strength to bail out the banks and honour these guarantees.

Spanish national debt is not actually that high as a % of GDP but there are all sorts of hidden liabilities and big doubts over whether government cuts and tax rises will bring it under control or simply make the economy even weaker.  The Spanish have been struggling to sell their bonds at reasonable rates of interest rates and indeed it is only the local banks that have been buyers recently.

Spanish banks have been stepping in to buy their government's bonds using dirt cheap  ECB loans they got in exchange for dodgy property assets.  Just who is propping who up?

There are no guarantees in Spain that inspire confidence - the banks have insufficient capital when compared to the optimistic values they contine to attach to their assets and the government cannot afford to pay its own bills nevermind bail out the banks.  Best therefore to stay clear.

There are plenty of alternative homes for Euro deposits but remember if you live in Spain but park your money offshore then you still have to pay tax on the interest.  It is definitely not a good idea to try and hide interest income because the Spanish tax office has information on all accounts including places like the Channel Islands and Gibraltar.  Given the pressure on them to bring in extra revenues, offshore accounts of Spanish residents are just the sort of place they will look.

This brings me onto another reason why I would be wary of holding much more than "walking around money" in a Spanish bank account: the authorities are getting desperate and are not afraid to confiscate money from people they suspect of avoiding tax using bank account "embargoes".  Even if you successfully appeal against the tax office when they wrongly make a grab for your money would you want the expense and hassle of fighting to get it back?

Finally there is what you might call the "Argentina factor" - the outside chance that things get really nasty with Spain's economy worsening further, leaving (or being ejected) from the Euro and deafulting on the national debt.  It dosen't take the world's greatest pessimist or cynic to envisage the government in these circumstances reneging on the bank deposit guarantee or repaying euro balances in new pesetas worth a fraction of the account's Euro value.

From our website:  Spanish maternity benefit