The " Bail Out " myth !

Many people in Spain think that the granting of a $125 billion bail out of the banks will restore the good times.   The banks will be awash with money and they will again be lending, financing expansion of existing businesses and backing new ventures that will soak up the unemployed and lift living standards.

Nothing could be further from the truth.  This bail out does nothing to remove the source of the great financial problem facing Spain - and other Common Market countries.   That all stems back to the pre-2008 era when the world was enjoying record low interest rates, the banks had AAA credit ratings - and the western world was experiencing a housing boom.   Astronomical amounts were poured into new housing construction and the price of property was on an upward roller coaster - and then the bubble burst !

Suddenly, the banks were facing a sea of red ink from non-performing loans.  There were acres of unfinished housing developments and more acres of finished developments which could not find buyers - and most damaging - hundreds of thousands of unfortunate people who had bought into this boom market and now had a mortgage far higher than the value of the property on the deed.   To make matters worse - rising unemployment was causing these people to renege on loan payments.

Lets be realistic about this bail out money.   The World bank and the International Monetary Fund ( IMF ) get their capital from the countries in the EU.    It does not take the form of an exchange of cash.   Each government makes a pledge and uses this as a reason for cutting back national spending.  In the case of Spain, no sacrifice is asked from the general public because the bail out specifically applies to the banking sector.

Where the danger of financial collapse enters the picture is the loans coming due from the Spanish banks acquisition of funds from the big international banks, pension and superannuation funds of various countries - and the array of institutions - such as hedge funds - which place money at interest in  the world monetary system.    If those bonds can not be repaid the entire system will collapse.

The bail out money will redeem these loans and pay the interest due on maturity, but these loans will be immediately renewed - with a new maturity date and at a new rate of interest.   In effect - the exchange of that bail out money will merely be an exchange of pieces of paper from the World Bank and IMF to the Spanish banks, and then on to satisfy their obligations and renew the old loans.   Nothing really changes, except that default has been technically avoided - and the interest rate has been increased due to changed credit ratings and risk.

There is one other significant change.   As things stood before the bail out, the party responsible for the debts  was the banks.   If they folded and declared bankruptcy the money they owed was lost - and that could have brought down the entire world monetary system.   Under this new arrangement, the bail out money is guaranteed by the Spanish government.    If the banks fail, the people of Spain owe that money.

In the commercial world this rearranging of debt by a series of " paper moves " is called a " Round Robin " - and it is illegal.   The directors of a company employing that strategy could expect to do serious gaol time !

When the United States bailed out it's " too big to fail " financial institutions, there was bitter comment that the bankers did not do their part of the deal - and start lending to get the economy moving.   Do not expect a  spending spree in Spain either.

This bail out seems little more than rearranging the deck chairs on the Titanic.    The ice berg is still ahead - waiting for the moment of contact to arrive !