Wednesday, May 29, 2013

Credit crisis back with a vengeance as Bankia's customers take a hit

This column doesn’t usually express much sympathy with shareholders because a share gives the right to profits derived from other people’s labour. But the plight of shareholders in the Spanish bank, Bankia, requires us to make an exception.

Though shareholding in a joint-stock company predated the advent of capitalist production, it became one of its defining characteristics. To be a shareholder in an enterprise is, in fact, to be a capitalist.

These day, shareholders tend to be major financial institutions who’ve used their inflated holdings of other people’s cash to obtain part-ownership of global corporations. The day of the small shareholder has vanished, replaced by pension funds, sovereign wealth funds and the like.

These globalised ownership structures exist solely to extract value from the labour of people working on the production lines. These range from the sweatshops of low-wage countries like China, Latin America, Bangladesh, the Philippines to advanced, hi-tech production in Britain, the United States Europe and Japan.

We tend to worry even less about the fate of shareholders in banks, who hope and expect to become rich making money out of making money. 

Bankia, with Rodrigo Rato, former managing director of the International Monetary Fund as its chairman, was formed in 2010 from seven regional savings banks, following the global financial crash of 2007-8. All were dangerously exposed to the collapse of the property market.

As of 2012, when it was nationalised to prevent its collapse, Bankia was the fourth largest bank of Spain with 12 million customers. On the 25 May 2012, it requested a bailout of €19 billion, the largest bank bailout in the nation's history. Rating agency Standard & Poor reduced its credit rating to “junk” status, along with several other Spanish banks.

In 2011 the bank had offered shares for sale with the expectation of attracting new capital from international institutional investors. They wisely stayed away.

So the bank turned to its customers for help.

Hundreds of thousands of ordinary people who had their savings deposited in the bank were persuaded, or rather tricked, into exchanging their savings for shares.

The scale of Bankia’s losses mounts with every new assessment. The latest figure for 2012, published in March this year, puts it at €19.06 billion, the largest corporate loss in Spanish history.

Yesterday, for the first time, the savers-turned-shareholders were able to put their shares up for sale. They got a terrible shock. The price of shares on the Madrid stock exchange dropped like a stone. The bank had lost 99% of its value since it first entered the market less than two years ago.

The life savings of so many families have been wiped out. Completely.

This catastrophic collapse of value so far affects just a small part of the vast overhang of credit and debt left high and dry by the effects of the end of the post-war growth, seen most painfully in the receding European economy.

There’s much more to come. Bad debt has driven Slovenia’s economy into a recession. This afternoon infamous troika – the European Commission, the European Central Bank and the International Monetary Fund – will respond to Slovenia’s plan for bank recapitalisation costing €900m and a planned record sale of state assets.

But that’s a tiny amount compared to the spiralling, out-of-control credit crisis in China, without which even its slowing rate of economic growth would be impossible to maintain.

According to JPMorgan Chase unregulated, “shadow banking” is as large as 36 trillion yuan ($5.86 trillion). That’s equivalent to 69% of China’s gross domestic product and almost double what it was two years earlier.

The credit crisis which exploded in 2007-8 giving way to a global slump is far from over.  Very far. A renewed global crash can’t be far away. Bankia’s victims are amongst the first to feel its effects.

Gerry Gold

Economics editor

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