The European banking crisis is a fiscal disaster: The bailout of only seven banks has cost tax payers 35 billion euro. European bailout funds for instance would not have been necessary for Spanish institutions, if creditors were involved in the losses at an early stage. It is the national government’s fault. But also the lousy crisis management by the group of Euro countries, the Commission, the ECB and IMF contributed to this expensive failure.
This is the outcome of the detailed analysis of the balance sheets of crisis banks by Joachim Dübel (Finpolconsult). The study was commissioned by the Green group in the German Bundestag and in the European Parliament. The total cost of the bailout of banks in Cyprus, Spain and Greece is estimated at 90 billion euro. While the amount of awarded capital grants is already known, the aim of the study is to quantify the tax money that is definitely lost, and how these losses could have been limiterd by a consequent involvement of creditors. Because creditors were not involved in the bailout of the four Greek banks the governmental bailout fund (HFSF) lost more than 20 billion euro. This corresponds to 15 percent of the Greek GDP. If the golden parachute for investors had not been paid by tax money, the renewed discussion about a hair-cut for public investors would be obsolete.
Instead of consequently involving creditors, the European heads of government led by Angela Merkel and the German finance minister Wolfgang Schäuble have accepted a head-in-the-sand policy. Thus, shortly before the bailout of banks that were known as insolvent, financial instruments that were qualified as equity were repaid to the investors. Others were bought back at inflated prices during the run time or converted in share certificates. In order to make the converting in such certificates more attractive, own shares were rebought reducing the liable equity even more. Thus, the share of own stocks in the portfolio of Bankia, Banco Popular and Banco de Sabadell increased from less than 0,5 percent in January 2012 to more than 3 percent in June 2012. Even while the EU rescue programmes were already running, transactions like these continued taking place.
This kind of policy is comparable to a government that allows property insurers to cancel contracts while a hurricane is approaching and ultimately pays the damages with tax money. To make it clear: None-involvement of credotrs is nothing else than a redistribution of private losses to tax payers. Banks were kept alive, also by ECB loans, until the last investor was able to run away. The legacy of this policy are a number of zombie institutes that continue creating uncertainty in the euro zone.
As an important reason for the disgraceful behavior of governments, the study points out the close link between investors and national governments. The biggest potential losers of bank failures were able to put the decision makers under enormous pressure. Whereas the amount of subordinated bonds came to 101 billion euro in 2009, the sum was almost halved to 56 billion by June 2012. Every euro paid off is a gift to the creditors.
Furthermore, the study shows that there has been enough time to implement the necessary legal framework for a consequent involvement of creditors. The main problem is not missing or insufficient basic rules, but the lack of political will to force private investors to cover for bank losses.
This may not happen again. We must turn away from the public support of private investors with tax payers’ money and build a system that ensures the take-over of losses by the creditors. Therefore we need a European institution to restructure and resolve banks, free from conflicts of interests. As with the commissions competition policy framework, this institution should act in the interest of tax payers. The liability of taxpayers will only end, once the German conservative liberal government has given up the resistance.
You can download the study here.