And now, Spain

The Greeks have behaved themselves by voting the way the European bankers and their hired nannies demanded, and the illusion of obedience to the failed and failing austerity program slapped onto the sorry islands will continue for a while more. It may prove to be a blessing that the leftist Syriza party did not win Sunday as the collapse would likely have been hastened and then blamed on them. This way, the establishment parties can preside over the next phase of the debacle.

But enough of that, Greeks can now go back to eating out of garbage cans and dying of sepsis on the steps of abandoned hospitals. It’s the Spaniards who will take their place as the next set of bad boys and girls who have been spending their allowances in all sorts of naughty ways and must be punished.

The latest development in the ongoing European train wreck was the infusion last week of 100 billion euros into the Spanish financial system, which was designed to boost confidence in the country’s banks and lower Spain’s borrowing costs. It was a colossal failure on both counts; one reason was that the new block of cash was dumped on the Spanish government and became senior, meaning that if Spain starts to go seriously broke, it’s the European-cum-German paymasters who will standing at the head of the line to be paid back first.

Significantly, said the New York Times today:

Most delicate will be whether the Spanish banks receiving the largest cash injections, like the nationalized mortgage giant Bankia, will be forced to impose losses on holders of their subordinated bonds. Those are the investors whose bonds are not backed by collateral and are thus considered more risky.

Tough titties, one might say, except that the non-collateral bonds referred to are not some arcane financial instrument shuffled among overpaid MIT grads at Deutsche Bank, but rather the nest eggs of frugal Spanish retirees.

A comment on Naked Capitalism fleshed out what happened in Spain, which should promptly remind us of our home-grown financial shenanigans a la sub-prime and CDOs. Here’s how the counterpart in ever-so-modern Iberia worked, according to ‘Bobito’:

Some years ago Spanish banks and cajas [the government-owned regional banks] began actively promoting to their retail customers what in Spanish are known as participaciones preferentes, and other financial instruments, as I understand it essentially preferred stocks, . . . For the most part these customers were retirees and ordinary savers with little or know financial knowledge, and they accepted the offers because they sounded good (perhaps too good). To some extent the risks of purchasing such instruments were actively concealed or obfuscated (i.e. they were presented as like a savings account, but with returns). To say it less charitably—the banks perpetrated a massive and conscious fraud. The reason that so much subordinated debt is held by ordinary retail customers is that they had no idea what they were purchasing. People should be in prison for this, and it would only compound the criminality to wipe out the savings of thousands of not very well off people.

It’s hard to over-emphasize this: the people now set to get hammered by the ‘restructuring’ of the collapsing Spanish banks are the banks’ own retail customers who put their money into unsecured bonds because the nice lady behind the desk said it was a good idea and essentially just like a deposit.

Edward Hugh at EconoMonitor describes these savers thus:

. . . this measure would penalise the very people who help keep Spain’s banking system together, those small savers who forwent going for holidays on credit to Cancun, Thailand or Japan and failed to increase their mortgages in order to buy lavish SUVs in an attempt to save for their retirement. These are the people who now face the prospect of losing their precious savings to cover the losses generated by those who did both of the above.

So there we have it: the banks get saved from their folly, and those foolish enough to trust their branch bank managers’ advice are set to lose their patiently accumulated net worth. Voila, another round of the Bush-Obama approach to financial panics: save the banks at all costs while dumping the burden onto gullible consumers who did what they were told. And what are the chances that criminal prosecutions will follow any of this as has (not) occurred here at home? This is what modern casino capitalism has brought us to, but don’t expect it to be described that way on CNN or in the pages of the chin-stroking papers. Oh no, it’s going to be all about whether Spain will ‘tighten their belts’ and ‘accept reforms’ or dare to ‘reject the bailout’ like the Greeks almost did. Next set of victims!