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 but its assessment of the risks is now out of date because of the crisis in Cyprus.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

Euro doubters are being proved doubly right

It seems absurd now but a decade or so the UK was very close to joining the Euro. Tony Blair’s Labour government, popular and trusted (yes, it was a long time ago), was pushing for it and only some stubborn resistance from Gordon Brown kept Britain out.

One of the key “pro” arguments was that interest rates would be lower. The pro camp was obviously hoping to sell the Euro with a bribe of lower mortgage rates. I remember thinking at the time that this was a hollow and short-sighted argument.

Lower interest rates are not a good thing necessarily. Interest rates need to be high enough to balance saving and spending. Set too low and the risk is of unsustainable booms and horrible busts.

The euro-sceptics pointed out that a single interest rate for Europe would be bound to leave some parts too high or too low rates with nasty consequences. Events have proved the doubters right of course but there is more to the story.

The arguments against joining were not wholly economic. Indeed the dangerous economic consequences of joining were a side issue for most opponents who feared the political logic more: the Euro was an irrevocable step towards a European superstate which rendered national governments almost powerless on the things that matter.

Pro-Euro campaigners either played down the loss of sovereignty as scare-mongering or argued that it would be a good trade off – slough off your little-Britain hang ups and reap the economic benefits, they said.

Now the Eurozone threatens implosion that position looks ridiculous: all 17 members face the prospect of ruin and disaster unless they join together in a fiscal union. Exactly what the Euro’s opponents predicted and the Euro-enthusiasts perhaps secretly hoped for.

What will this Eurozone superstate look like, if indeed it gets off the ground? Again you don’t need a crystal ball to see the shape of things to come. It will be hugely wasteful of public money, highly bureaucratic, damaging to business and most of all grossly undemocratic.

The citizens of the Eurozone must already feel like they are helpless onlookers watching their political elites flounder in the crisis that they themselves created. They can now look forward to permanent Euro hell as the price for preventing economic meltdown.

From our website: A guide to Spain's autonomo system

Is there any point to the Spanish Elections?

Spain goes to the polls on Sunday to elect a new government and, yes, my question is facetious. Of course the elections are not pointless; no democratic election ever is. Apart from anything the people will get their chance to pass judgment on the record of Prime Minister Zapatero and his Socialists. Polls point to a big thumbs down and the election of the PP and their leader Mariano Rajoy who has tried and failed to win twice before.

But will it make much difference whatever happens? Spain is so close to the eye of the Eurozone storm that any new government will be powerless against the combined forces of the bond markets and the Eurozone. The PP are talking tough about bank reforms (which will surely send Spanish property prices down further – How the bailout could send Spanish property crashing) and labour market reform but it will be Germany and the ECB that decides Spain’s fate.

Look at the way that Berlusconi was finally forced from power. The Italians are well rid of him but it took Eurozone threats to do the job. It is notable that the new Italian government contains not a single elected minister.

Over in Greece the call for a referendum to get popular support for austerity measures was taken as a “breach of trust” by France and Germany; Papandreou was kicked out and Greece was effectively blackmailed into cancelling the vote.

I don’t subscribe to the theory that the Southern European countries are being drawn into a German super state but they certainly have lost control of their destiny. Either Spain and the others will be rescued by Germany or it will be forced to crash out of the Euro. It’s that simple and Sunday’s vote will not change a thing.

Latest article: Spanish holiday property UK and Spain tax considerations

The Greek bail-out could send Spanish property crashing

Last week’s Eurozone bail-out involved some debt relief for Greece, more firepower for the EFSF (the bailout fund for other crisis countries) and a bank recapitalisation plan. Quite apart from the fact that most market observers think the plan is flawed and inadequate, the last bit that should have Spanish property owners worried.

In theory, topping up the capital buffers of the banks, particularly Spanish ones which are among Europe’s weakest, should be a positive development. The banks will be safer in the event of a new crisis and there should be less fear in the interbank market, a key feature of the original “credit crunch”.

There are two ways for a bank to boost its capital adequacy ratio: raising more capital or slimming down in size to make its existing capital look proportionally bigger.

Investors are rightly suspicious of banks so raising fresh capital by selling shares is not going to be easy. Higher capital ratios themselves imply lower profitability for the banks, making it harder for them to raise capital.

Perversely Government and EU officials are making it even harder for the banks to raise capital by demanding that they pay less in dividends and pull out of certain areas of business. The proposed financial transaction tax is also depressing bank share prices.

So banks are more likely to choose to go on a diet – desperately reduce in size to meet the new adequacy ratios without raising more capital. But how do banks reduce in size? There are a few ways, all of which are negative for growth and asset prices. They can sell non-core businesses like insurance or overseas subsidiaries. They can reduce the size of their loan portfolios by slashing the amounts they are willing to lend to households and businesses. They can also sell off other assets like the properties they have repossessed.

This is what Santander intends to do according to this article in the FT: Santander seeks to offload €3bn of Spanish property If all the Spanish lenders do the same then there will be a flood of new property on the market at knock-down prices. At the same banks will be trying to cut down on lending to businesses and homebuyers.

Throw in further austerity measures by the government and falling demand in most export markets and it’s hard to feel optimistic about the Spanish economy right now.

Related : 10 reasons why Spanish property prices will stay depressed

Now IS the time for a referendum on Europe

Over 100,000 signatures collected by volunteer groups and some brave Conservative MPs have forced a vote in Parliament over UK membership of the EU. All the main party leaders are forcing their MPs to vote against a referendum. Strange bed-fellows Cameron and Miliband are effectively saying the same thing: now’s not the time.

They are wrong. It’s the perfect time for the British people to be given a say on the EU. After all they have not been consulted for over 35 years. They have never had the chance to say whether they want to be part of what the EU has grown into since those seemingly innocuous origins of six countries in a Common Market.

Since then, with barely a nod to democratic process, the EU has grown into a 27 state behemoth that reaches into every legislative area, slaps down our courts and parliament, dictates who we can let in to the country and claims to speak for us in the world.

It also soaks up enormous sums of money, a net £12 billion of which comes from the UK taxpayer. As we wrestle with a massive fiscal deficit, now is most definitely the time to consider whether we can afford to pay this massive subsidy to our neighbours and debate what we get in return.

Many other economic issues are tied up with the EU from the burden of regulation on industry to the effects of unchecked immigration and the impact of EU schemes to undermine the City. Far from a referendum being a distraction in a time of economic crisis, it may be a pre-requisite of recovery. We should at least be able to debate the arguments rather than remain permanently shackled to the Euro project which has never looked so tarnished and dysfunctional.

Some argue that the sovereign debt crisis should be given priority at the moment and that a referendum is an irrelevance we could do without. On the contrary, the Euro crisis is the most compelling reason for a debate on continued membership. For one thing it has undermined one of the principal claims of the Euro-enthusiasts: that Europe does things better and we would be better off inside the club.

Also, however the crisis is resolved, it is sure to presage enormous changes in the way the euro area and EU are run. We deserve to be consulted before the UK government has to decide how to respond to the crucial choices that are bound to result.

Fundamentally the Euro crisis has exposed the dearth of democratic legitimacy in the rotten core of Europe. The political elites have pushed the project along hard and fast ignoring popular doubts and look what a mess has resulted. Just think of how the German electorate must think about their politicians’ promises about no bail outs and pooled debt.

With the sole exception of the Euro and one or two opt-outs, UK governments have gone along with the lot and have never put the issues to the people. Now is the time to remove that stain on our democratic heritage and have a referendum on this vital topic.

If you feel the same way you can make your voice heard (in a small way!) by signing the People's Pledge here.

On our website this week Spain is bringing back the wealth tax

Has the bears' case against Spain gone down the pan?

It was supposed to be PIGS in the plural not PIG. The smart money was betting on all the Euro area's peripheral economies buckling including Spain and not just Portugal, Ireland and Greece.

As Portugal finally opted to accept a bailout package, the headlines inevitably posed the question "Is Spain next?" The markets answered pretty emphatically "No". Ten year Spanish government bond yields stayed steady at just over 5% as they have they have done all year (for comparison the UK equivalent is around 4%). Traders and investors seem to have been reassured that Spain's economy is in better shape and crucially the government debt in relation to the Spanish economy much smaller than Portugal's (63% vs 83%).

Also the Spanish government seemed to have been shocked into action last year and made some labour market and pension reforms, put up taxes and cut spending and made a start on clearing up the mess in its banking system.

Everything OK then? Of course not, Spain is barely growing (GDP up just 0.6% last year), the banks have a lot of Portuguese debt, the housing market is still a disaster area and unemployment is shockingly high. On top of that the ECB has chosen to put up interest rates by 0.25% which feeds through to the EURIBOR rate which sets most Spanish mortgage rates. By some estimates this, and subsequent rises that the market expects to see, could add 800€ to the cost of the average mortgage. And of course there are the strikes we have seen recently and some big job cut announcements (Telefonica to cut 20% of its spanish workforce). Add in rising petrol prices and higher taxes and Spain is not a bear that is out of the woods just yet.

From the ADVOCO website: Spanish Income tax rates 2011