The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (37 page)

Regarding the mess left by Bancaja, a senior Bankia board member told
El Pais
about the reality of the assets on its balance sheet. ‘We were told about land on the beach front; when we went to look at the land we found it was 500 metres from the beach behind the A7 highway. Another caja had invested in a gated community of 1,000 houses in a village of 800 people.’ In Madrid a billion-euro loan for land purchases by a property company that went bust within a year was bad enough. Buying skyscrapers as the credit crunch hit the world economy was worse still. Before joining the IMF in 2004, at the beginning of the property bubble, Rato had been minister of the economy in the Partido Popular national government. So the central government was bailing out a financial institution with close links to its own party. In fact, the mess was so colossal that the Spanish nation needed help from the rest of Europe to foot the Bankia bill. Extraordinarily enough, when he was MD of the IMF, Rato failed to persuade Argentina to take the IMF textbook bailout medicine. Yet in his home country, the failure of his bank had brought IMF advisers in rather rapidly. In fact, one of the factors that understandably sparked deposit flight was an IMF statement demanding the strengthening of Spanish bank balance sheets, ‘especially the largest one’ – that of Bankia, run by the IMF’s former boss.

But the mess runs even deeper. Bankia was desperate to raise capital. The international markets said a swift ‘
No,
gracias
.’ When still prime minister, Zapatero forced some domestic banks to lend a helping hand. New shares were marketed and sold to ordinary Spanish investors for €3.50 each. In addition, some hard-up savers took up so-called preference shares offering 7 per cent annual returns – a higher rate than they could get elsewhere.

During my visit to FROB, it became pretty clear that these ordinary investors were going to lose the shirts off their backs. From €3.50 to €0.01 was the rumour. Officials were considering sparing them a few extra cents. Amazingly, these investments had been made on the basis of an unaudited set of accounts. Ordinary Spanish savers were left holding the baby after a decade of excess, incompetence and cronyism. Many even joined the protests against evictions, even though those evictions were ostensibly being carried out to recoup some money for the savers. Bankia had sparked a humiliating national bailout and the largest loss, at the time of writing, in Spanish corporate history. And what happened to the executives responsible for creating this beast that was too big to fail? While others lost their homes, they kept their high salaries.

At FROB, forensic accountants were searching through the balance sheets of all the cajas for evidence of wrongdoing. A week later they sent five cases to court. Most of these related to massive managerial pay packets, sometimes not even revealed to the board of the bank in question.

What a way to go. Cajas had been founded by churches on the Benthamite principle of achieving the greatest happiness for the greatest number, and set out to help farmers and ordinary Spaniards in the tough years following the Peninsular War with Napoleonic France. The profits from cajas were used to fund regional social projects, such as schools, hospitals and libraries. Caja Madrid, even after its own tragic accident, still funds many of Madrid’s ambulances. I had imagined that Spain might feel nostalgic for its all-encompassing savings banks. But no. One Spanish official told me that after all the scandals relating to managers’ pay, ‘the romantic notion of the cajas has disappeared’.

There is an interesting exception to the general rule. Catalunya’s savings bank, La Caixa, had a much more successful entry into the world of ‘real’ banking. As a caja it had always been run more commercially than most, with fewer of the political pressures that felled Caja Madrid and Bankia. When the cajas needed capital that they could not raise as mutual organisations, CaixaBank was created. CaixaBank helped with the rescue of other banks, bought back billions of euros of its mortgage covered bonds, and even continued to be the largest funder of social projects in Spain. The cajas were not born to fail, even if they have all now disappeared. The logic suggests that the problem was regional political interference – as seen at its most acute in Madrid and Valencia.

‘There was a moment in time when the caja model made sense in Spain,’ a Spanish treasury official told me. ‘They provided credit and let capital flow to the regions. It was a special model, but weak regional governance was the main weakness.’ The view from Spanish officialdom is that this was a standard-issue albeit gargantuan property boom-and-bust, exacerbated by a layer of incompetence due to the cajas indulging in a frenzy of politically motivated lending.

The image of the bubble suggests a benign and even playful process. Both the inflating and the bursting can be fun. But what happened in Spain might be more accurately described as a blister. When a blister bursts, the rawness of the underlying wound is revealed. An influential German official who knows Spain intimately says that he watched in 2005 as Spain’s property boom hollowed out its export base, affecting expansion plans for German-owned car factories in Pamplona and Zaragoza. Workers were being sucked into the construction industry, lured by the inflated wages on offer. Car production fell sharply as Spain’s economy oriented itself to serve the blister of credit, rather than manufacturing and export. Industry could not compete. This colossal misallocation of investment had a real impact.

The people left to pick up the pieces are the
milleurista
generation. In 2005 a 27-year-old graduate called Carolina Alguacil wrote to
El Pais
to point out that large swathes of Spain’s best-ever educated youth were struggling on insecure jobs paying a thousand euros (
mille euros
) a month. ‘You had better not complain. You can’t save, you don’t have a home, or a car, or any children. You live for the day,’ she wrote. By 2012, things had got unimaginably worse as youth unemployment soared to unprecedented levels. Now an income of a thousand euros a month represented an unachievably lofty aspiration for Spain’s lost generation.

In April 2012, in Madrid’s Puerta del Sol Square, Europe’s youth seemed to be stirring again. A large crowd of young people – the
indignados
– systematically shut down the square’s shops, chanting, ‘Don’t shop while we can’t work.’ It was the build-up to a massive march through Madrid and all of Spain’s major cities as part of an all-encompassing general strike. Before the Bankia collapse it was the most severe test for Spain’s conservative government. In 2011 they were
indignado
– merely indignant. By 2012, as Europe’s fourth largest economy became an economic laboratory for Berlin–Brussels sado-austerity, they were
enfadado
– angry.

Spain simply had to grow in order to get its young people back to work. Not just for their sake, but also for the sake of the national finances, which were reeling with an annual unemployment benefits bill of €40 billion – 4 per cent of the country’s GDP. At this moment the Partido Popular government introduced a brutally austere budget, which helped crush growth in 2012, and brought in a double-dip recession.

It is impossible to overstate the desperation of the youth of Spain. They are the best-educated Spanish generation ever, and for the most part they are jobless. Generation zero they’re called, or ‘ninis’ – neither in work nor further education. I talked to three typical twenty-somethings with no prospects: Alex had qualified as a teacher, Diana had a degree in human resources, and Ana has studied psychology. When they look for part-time work at low-paid fast-food joints they are told they are overqualified. These three represent the norm, not the exception, in Spain. Two of them had never worked at all, despite applying for some 200 jobs. ‘My experience is I have never had a job, I’ve always had temporary jobs. That’s for eight years,’ said Diana. Another had lost her job. All lived with their parents and expected to do so until their forties. They see these problems lasting until the 2020s. ‘We have to leave Spain, to go to England or Germany,’ said Ana. The teacher, Alex, said that he would go to Brazil.

Spain’s youth are leaving. During a trade mission, Spanish industrialists went as far as lobbying Brazil’s president for more visas for Spanish graduates. Spain’s massive immigration between 1995 and 2005 now seems to be a decade-long aberration in a continuous exodus of Spaniards out of their country. The worrying thing for Spain is that before 1995 this emigration was mainly of the least-qualified workers. Now Spain’s highest skilled sons and daughters are leaving, seeing no future in their domestic economy.

The millions of jobs created in the boom proved to be fleeting. From January 2003 to January 2008, Spain added 3.3 million jobs. By January 2013 it had lost those 3.3 million jobs, returning almost exactly to where it was a decade before. A former minister puts it slightly differently: ‘In Spain we are very good at hiring and firing. We created more jobs than anywhere else in the EU between 2000 and 2007. And then we fired them all.’ The 3.3 million jobs lost over the past half decade also mask a remarkable generational inequity. Almost all the jobs were lost by those aged 34 and under: 8 million of these young people had jobs in 2008, but by 2013 this figure had fallen to 5.1 million, a loss of 2.9 million. Those in the age range 35–50 were much more likely to keep their jobs: less than half a million were shed at this age range, with the workforce remaining around 8 million. Incredibly, in the over-50 age range, there was a net gain over this period of more than 300,000 jobs. The conservative government that came to power in Spain in December 2011 wanted to improve the lot of the jobless youth by making it easier and cheaper to fire highly protected older workers. Spain’s ‘two-tier’ labour market meant it was much easier to lay off younger workers, while older workers stayed in their jobs. The new government’s reforms should in theory help the younger workers, but when I put this to a group of them, they didn’t buy it.

Neither did Cándido Méndez, the leader of the UGT, one of Spain’s biggest unions. ‘If you add together the labour reforms and the cuts to public spending,’ he told me, ‘we’ll be caught in a vicious circle. The economic crisis will get even bigger, there will be more job cuts, youth unemployment will grow, Spain will get poorer and we will endanger the whole European Union.’ He drew an imaginary vicious circle in the air to ram home the point. Méndez has been calling for a general strike. (It’s worth pointing out, however, that the UGT effectively had a representative on Bankia’s board, paid a salary of €181,000. As a further illustration of Spain’s Byzantine power structures, it should also be mentioned that two decades ago the UGT set up a housing project that was partly funded by Caja Madrid. The scheme, which featured a folly in the form of a 100-metre sphere, went bust.)

The protests spread. And they intensified when the general stench of low-level local corruption started to percolate up to the very top of the Spanish government. At the heart of two cases were brown envelopes, secret payments, plush suburbs, construction companies and regional-government contract awards. Again, Partido Popular politicians in Madrid and Valencia were implicated, and in 2013 PP treasurer Luis Bárcenas was detained in jail ahead of a corruption trial over the origins of a multimillion-pound fortune and allegations of secret payments. He maintained his innocence. The timing could not have been worse. Grudging acceptance of austerity was always likely in a country as pro-euro as Spain. But austerity imposed by a political party implicated in bubble-era patronage, payoffs and corruption? Luis Garicano, a professor at LSE, believes that enough is enough. ‘During the bubble years, our society accepted a dangerous barter, in exchange for huge apparent prosperity,’ he told me. ‘We Spanish closed our eyes to corruption.’ Not only did the Spanish government have a credibility problem; people were also questioning its goodwill. Reforms meant to save Spain were being delegitimised. ‘In a life or death situation this weakness is dangerous,’ Professor Garicano argued. The recapitalisation of Spain’s banks could have been achieved with little fuss in 2008, 2009, 2010 or even early 2011, when financial markets were relaxed about Spain’s low national debts. The cost would have been cheaper than Britain’s bank bailout in 2008. But strong regional political interests attempting to protect the doomed cajas stood in the way.

The collapse of the cajas is leading to a considerable power shift within Spain. Power is being centralised, undermining the post-Franco settlement of autonomous regions. The cajas were tools of regional influence, tools that are now gone forever. Regional government was largely funded by property taxes – and these are not going to return to former levels any time soon.

On the way into this crisis Garicano describes how a tsunami of credit from northern Europe (caused by the euro’s structural flaws) disappeared into a Bermuda Triangle made up of the regional governments, the cajas and the real-estate developers. On the route out of this crisis another triangle is apparent, consisting of a distrusting Eurozone, divisive politicians, and a demoralised people. Spanish kids are returning home from primary schools singing playground songs with new rhymes, such as ‘I’m on the dole’, to their shocked parents. On the outskirts of Madrid stands one of the grand plans to revive the post-blister economy: this is EuroVegas, a giant complex of supercasinos. Madrileño parents wonder if their children’s ambitions may be limited to becoming a croupier in a brash Las Vegas-style monstrosity.

Much of the burden of adjustment has fallen upon Spain’s strong family networks. The massive increase in household debts is strongly concentrated on a smallish slice of Spanish society. Even after the crisis, nearly half (47.5 per cent) of all houses in Spain are owned mortgage-free. In Germany and the UK that number is around a quarter. So as Spanish society defaults on parts of its social contract, families have stepped up to fill in the gap, helping indebted young relations, and housing jobless workers. Foreign workers too are helping each other in the battles with the banks. This is why Spanish officials insist that the
cédula
system remains a top-quality credit, with zero defaults. They say that if a mortgage has been repaid for more than four years, then it is likely to go on being repaid. But at some point, even the support cushion supplied by families will wear out.