Former Spanish financial leaders were optimistic about the country’s financial condition while the crisis that led to its recent bank bailout was drawing nearer, according to The New York Times.
These leaders, who were first at the Bank of Spain and then became top executives at the International Monetary Fund, were touting Spain as being financially sound.
In 2010, Jose Vinals, director of the monetary and capital markets department of the IMF, told a news conference that the Spanish system was “fundamentally sound” and its needs for cash “very small” when analysts were cautioning about failing Spanish real estate loans.
And in 2011, Vinals said the bailouts in Ireland and Portugal would not invade Spain.
Jaime Caruana, previous director of the monetary and capital markets department of the IMF and current general manager of the Bank for International Settlements, was not any more cautious. When asked about declining housing prices in Spain in 2008, when he was at the IMF, he said, “The financial system in Spain is able to cope with that and is properly capitalized,” The Times reported.
While both men were at the IMF, the organization’s economists produced reports that chronicled Spain’s bank crisis.
Vinals supported efforts at the Bank of Spain to bring order to the sector, including the merger of seven savings banks to form Bankia SA in 2010. Bankia, Spain’s biggest mortgage lender and the country’s fourth largest bank, failed and prompted the country’s request for a rescue.
In addition, Spanish officials were slow to recognize the profound problems.
For instance, Rodrigo Rato, then the executive chairman at Bankia, said in early May that the bank had “great robustness, both in terms of solvency and liquidity.” The bank was bailed out a few days later, according to The Times.
Rato was the managing director of the IMF from 2004 to 2007 and was “known for praising Spain’s economic miracle—one that relied largely on revenue driven by real estate to drive growth and balance budgets,” the newspaper reported.
An IMF assessment of the country’s economic and financial system in 2007, when Rato was still with the organization, praised the “dynamism of Spain’s financial system,” and said that “its strong, prudential supervision and regulation remain a forte of the economy,” according to The Times.
The European Banking Authority, Europe’s main bank overseer, also did not foresee Spain’s financial crisis.
Moreover, the Bank of Spain sent a report to the government in 2006 that cautioned of the extraordinary acceleration of real estate loans. Further, the report warned that Spanish banks were engaging in heavy short-term borrowing at levels “far beyond their deposits,” according to The Times.
Spanish financial institutions were once praised for responsible banking, having set aside more than $137.16 billion (110 billion Euros) in reserve due to a dynamic provisioning policy that forces banks to set aside extra cash during good economic times to hedge against bad economic times.
Jose Garcia Montalvo, a real estate specialist based in Barcelona, told The Times these reserves were not sufficient because the Bank of Spain in 2004, while being led by Caruana, “succumbed to bank lobbying and pressure from Europe by halving the amount that banks had to set aside to 15 percent of overall loans, from 30 percent.”
The IMF states that it is not a regulator and that it warned officials of the need for Europe and Spain to address banking problems, according to The Times.
“The IMF has consistently and clearly flagged the dangers that exist in Europe and the urgent need to recapitalize banks,” William Murray, a spokesman for the IMF, told The Times. “Anyone who claims the contrary is either misrepresenting the public record or just does not understand how the fund works.”
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