Seeking Alpha
Value, contrarian, bonds, long-term horizon
Profile| Send Message|
( followers)  

The problem with bailouts is that they allow companies with either poor economics or weak financial structures to compete on a more level playing field with stronger competitors. The bailouts are like a subsidy which gives an unfair leg up on competitors via government largesse. Many political leaders recognize this, as we saw during late 2008′s competitive auto company bailouts as the Swedes and Germans complained about the US auto bailouts. Ford (NYSE:F) could legitimately complain about unfair competition with GM and Chrysler since it never received a bailout.

Now, we are witnessing the same dynamic in the Eurozone as a number of banks have become addicted to the ECB’s lending facilities, giving them cheap access to capital despite their continued loss-making operations. In Spain, BBVA has started to complain about this, noting that the cajas can offer high savings rates to depositors despite continued losses only because of the government subsidy.

Below is my translation of excerpts from an El Pais story on the issue:

Not a day passes without some financial executive opining on the speed of financial restructuring of the cajas and the war for deposits. Tuesday was Emilio Botin, chairman of Santander, and yesterday Ángel Cano, CEO of BBVA.

This executive called for a "level-playing field" by early 2011 where everyone plays the same game. "It is unacceptable that a loss-making entity, which has received public money, can make deposit campaigns for 4% [interest], generating more losses for the institution. It’s something that the rest of us do not do with our own money, much less if it is public funds" he said.

Cano said that between March and September, the company had picked up 12 billion [euros] from the competition. So far BBVA has said it did not need to pay more for deposits because it has excess liquidity. However, yesterday, the CEO explained what they have done to "protect" their customers. "It has been an advantage that we have reached this war one and a half later because our margins have deteriorated less than competitors," he argued. What is not said is if they have let profitable customers go.

This story reminds me of the Irish banks, which subsequent to the Irish state deposit guarantee began siphoning off British customer deposits by offering above-rate deposit yields (backed by the Irish state guarantee). Now that the Irish government has sustained massive losses in bailing out these very same banks, we can see that these uneconomic deposit rates are the result of a moral hazard – one which can end up costing taxpayers a lot of money.

Meanwhile in Spain, BBVA could earn 13% more in 2010 than in 2009 because they had taken less risk in the local Spanish housing market. This has allowed them and national rival Santander to expand beyond Spain into the US and the UK as other companies retrenched. The ECB has said it will stop the subsidy to easy credit-addicted euro banks in 2011. However, we can see that doing so will mean hard economic times for some, especially those loss-making entities on the European periphery, adding further to economic pressure there.

Source: El BBVA critica que las cajas con ayudas compitan perdiendo dinero – El Pais

Source: BBVA Complains About Subsidy for Loss-Making Spanish Cajas