Espirito Santo

Portugal's biggest bank appears to be bust – Espirito Santo misses payments. Its not alone. Pretty much all of the world's banks are insolvent. They are dead men walking, zombies that still walk the earth only because they are being given the appearance of life by massively inflated balance sheets, pumped up on a bubble of fictitious capital, and kept inflated by sequential injections of central bank liquidity. That is the real reason for all of the QE and other measures. Its not to stimulate the economy – it would have long since failed had that been the objective – but only to keep the banks going for a while longer while they try to shift the burden on to the state, private individuals, and simply to come up with a solution that does not involve all these banks openly going into bankruptcy.

Espirito Santo, may not seem important. It is Portugal's biggest bank, but Portugal is only a small country. However, Espirito Santo is part of a group based in Luxembourg. Luxembourg too is only a small country, but its exposure to international banks is considerable. It is far greater, for example, than that of Cyprus, whose banks were the last set to go into default. As I wrote at the time – After Cyprus, Who's Next?.

For the last two years, following Mario Draghi's promise to do “whatever it takes” to save EU banks, and sovereign bonds, the yields on those bonds have been falling, as they were seen to have the same kind of central bank backing that the US Federal reserve has given to US bonds. When the US started tapering, it hit emerging market economies, whose currencies began to fall, causing their potential inflation rates to rise, and pushing their interest rates higher. The wash back from that was that money flowed out of their bond markets and into the US, UK, and even peripheral Europe. I pointed out at the time, that this was merely the first round of “volley firing”. At some point, these emerging market currencies would fall, and their interest rates rise to such a level, that they became attractive once more to hot money. Then the attention would fall back on the European periphery. This could be the start of it. Today, as global markets shuddered after the Portuguese news, emerging markets were less badly affected.

 Last year – I pointed out that despite the crash in property prices in the US, Ireland and Spain after 2008, we still have massively inflated property and other asset prices. That is necessary to keep the fictional capital of the banks as a mirage to prevent a global financial crash. As pointed out in those posts,  Moneyweek had set out that Deutsche Bank in Germany had €55 trillion exposure to derivatives, whose purpose it seems it to keep its debt exposure off the balance sheet. For comparison Germany's GDP is just €3 trillion, whereas €55 trillion is equal to the entire global GDP!

According to Espirito Santo, it needs to raise an additional $1 billion in capital, but other banks have estimated that it requires more like $4 billion. That would wipe out its capital buffer, and its hard to see how it would cover this capital apart from a further state bail-out. It has little chance of issuing bonds that any sensible investor would buy, and if it tried to convert its debt to equity, the price of the shares, which have already collapsed, would simply sink to nothing. In fact, its already had an effect in the market, in Spain a so called Co-co, or contingent convertible offering was pulled in the light of the market turbulence.

We should oppose any further state bail-out of these banks. Even if it would work, it would only defer the real solution, which is a massive devaluation of all of the fictitious capital that underpins them. As I wrote recently, the UK property market needs to fall by around 80% to get down to fair value, even after the falls in property in the US, Spain and Ireland, property there is still over valued, especially after price rises in the US and Ireland over the last year or so. Stock markets are similarly over valued. These are bubbles that were originally blow up in the 1980's, and 90's, and that is a measure of how far these asset prices need to fall. In Japan, when its asset price bubble burst in the late 90's, prices fell back to 1983 levels.

As Marx demonstrates, none of this fictitious capital adds any value, or any wealth to the economy. In fact, it does the opposite. It makes property unaffordable, and pushes up the value of labour-power, it pushes up the cost of decent pensions, pushing up the value of labour-power further, and speculation and swindling for fast capital gains, diverts money-capital that could otherwise be used for productive investment. We should simply let the banks and finance houses go bust, and allow the massive bubbles in the property, stock and bond markets to burst.

The state should guarantee the savings of depositors, and should provide whatever liquidity is required to keep the economy itself functioning, and should promise to do so ahead of any such crash, so as to prevent a credit crunch as happened in 2008. When the banks and finance houses have gone bust, and become essentially worthless, their workers should take them over, and begin to run them as a worker owned and controlled co-operative, so that this kind of casino capitalism can be consigned to history.