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A Theme Park, An Airport And The Next Banking Crisis

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A Theme Park, An Airport And The Next Banking Crisis

Planet Money

A Theme Park, An Airport And The Next Banking Crisis

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We have seen some positive economic news in the United States in recent days, but the world economy still faces many problems, including Spain, which faces a debt crisis. Unlike Greece or Ireland, Spain may be too big to save. If Spain were to default on its debt, that could affect other countries, including ours. The future depends then on the health of the Spanish banking system, and the health of the Spanish banking system depends on the man who's been called in to save it.

Here's Chana Joffe-Walt from our Planet Money team.

CHANA JOFFE-WALT: The man responsible for averting another global economic meltdown has a small frame. He scribbles every other word and number he speaks onto a pad of paper - and he's got a really good name for the job.

Mr. ANGEL BORGES (Banking Specialist): Angel. Angel. I don't know how to pronounce it in English. We say here: Angel. It's Angel, I mean, like Charlie's Angels.

JOFFE-WALT: Angel, Angel Borges. He spells out in big letters, Angel, with his pen and paper. Angel is a banking specialist and a few months ago he got a call requesting that he please assist in saving the Spanish banking system, more specifically to try to save a very peculiar type of Spanish bank called cajas de ahorros - small, very local banks that are at the center of Spain's banking crisis. More than half of Spanish banking deposits are in this kind of bank. And they're not run by bankers but by local politicians, or in some cases, priests.

Professor LUIS GARICANO (London School of Economics): The cajas have been safe and boring. That has been the traditional until a few years back.

JOFFE-WALT: A few years back, when Spain joined the euro. This is Luis Garicano, by the way. He's an economist at the London School of Economics. And he says being part of the euro meant cajas could borrow money cheap. Being in the midst of a real estate bubble in Spain meant the cajas could lend it out and make a lot of money.

Cajas bankrolled huge development projects, way outside of their local areas: housing, office space. One caja opened a theme park. Another caja opened an airport in La Mancha, 120 miles from Madrid.

Mr. GARICANO: Your listeners will know La Mancha as the area where Don Quixote lived. And it's as empty as it was in the time of Don Quixote. It's a big plain with cereal fields. You can imagine it as completely empty. And in the middle of that plain there's an airport to which nobody wants to fly.

JOFFE-WALT: Which brings us to the part of this story you already know. It all fell apart. The real estate bubble popped, and the cajas were left holding the bag. Which means the world's investors are now worried that losses at Spanish cajas will be enormous.

Which means Spain has to do something to convince those investors - no, no, no, no, things are OK here. Do not stop lending.

So last July the Spanish government issued this directive to the local politicians and priests who run these cajas: Team up, the government ordered. We don't care how you do it, but by the end of 2010 there need to be about a quarter of the number of cajas as there are now. Figure it out.

Enter Angel and his pen and paper.

Mr. BORGES: OK. One year ago there were 46 savings banks in Spain, 46. From 46 to 12, you need to find combinations of these. So some of them were...

JOFFE-WALT: So who's going to get partnered with who?

Mr. BORGES: Yes, that's it.

JOFFE-WALT: Angel had worked with a lot of cajas before, so they hired him to facilitate the process - to try to help find each other and team up. He would arrange meetings between banks.

Mr. BORGES: First of all, we'll talk without any type of commitment, anything like that. Let's know each other, to see whether there's some, what we call here in Spain what is chemistry, chemistry between them. And if there were some good looks between the two of them, we will go along. I mean, let's work together and what would be a nice arrangement of what would be a...

JOFFE-WALT: So you're like the man arranging marriages between cajas.

Mr. BORGES: Something like that, yeah, yeah, something like that. So it was funny, was funny, the process.

JOFFE-WALT: It was funny for a little while. There were good looks, there was chemistry, there were dreams. Angel would arrange more meetings, and it would all be going well until inevitably someone at the table would ask the question...

Mr. BORGES: Who's going to lead? Who's going to lead?

JOFFE-WALT: Who's going to be in charge?

Mr. BORGES: Yes. Who's going to be in charge?

JOFFE-WALT: That was the hardest question. And there were other problems.

Mr. BORGES: If you have two saving banks who are going to merge, you don't need two accounting departments. You don't need two risk departments. You don't need two marketing departments. You only need one. And for that you need to fire some people.

JOFFE-WALT: Also, if you merge one cajas from a poorer region with a cajas from a richer region, what do you pay the IT people - the higher wage or the lower wage? What should the bank be called?

In one case there was a cajas in the South that merged with a Basque cajas from the North with a Basque name. And a lot of people in the town in the South told me they consider Basques to be terrorists. So when the Basque bank wanted to put their name on the ATMs in the South, people started talking about a Basque invasion.

Luis Garicano, the economist, says these are tiny problems, though, compared with the fundamental question - who is going to lead - which in a lot of cases hasn't exactly been resolved.

Mr. GARICANO: And the worst case is, for example, Caixa Nova, Caixa Galicia, two cajas from the northwest of Spain. What they have done is they take turns. They have decided that one CEO is going to be the CEO for 18 months and the other guy will be there after 18 months. And in every position from the top to the bottom, they've put a general director and a vice general director and a marketing head and a co-marketing head and a finance head and co-finance head - and so they have two jobs for every - absolutely every function.

JOFFE-WALT: The mergers were supposed to be completed as of January 1st. And for the most part they were. Now, are the merged banks necessarily better off? Well, even their matchmaker, Angel Borges, told me he is sure there is going to be more problems and more mergers will be needed.

Mr. BORGES: I don't know if it's going to be next month or next 18 months or next three years, but they are going to have - I don't know...

JOFFE-WALT: You think this is only the beginning?

Mr. BORGES: Sure, definitely. Definitely.

JOFFE-WALT: Whether or not he's right really matters to us. If investors stop lending to Spain and Spain can't afford its debt, Europe might not be able to bail it out. That could cripple the entire financial system. And in some ways it doesn't matter if the government actually succeeded in making the banks healthier. What matters is that people believe they have, that investors believe they have.

This has been the whole challenge for European governments throughout this debt crisis, and for the U.S. a couple years ago. It is really hard for a government that might collapse if its banks are insolvent to convince the world that its banks are not insolvent. Ireland failed at making this case, and now the fear is that Spain will too.

Chana Joffe-Walt, NPR News.

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