Confused signals to the public

The government of Mariano Rajoy has not taken a very confident first step in what it rightly considers a crucial aspect of its economic policy: a new reform of the financial system. Last week, Economy Minister Luis de Guindos offered a close-up view of the situation of the Spanish banks and cajas (regional public savings banks, recently privatized and in part amalgamated) in a British newspaper. From this, the reader gathers that the banks are going to have to make new provisions worth 50 billion euros in order to cover the growing deterioration of real estate assets (land and developments) which is now stifling the balance sheets of the Spanish banking system.

Just in passing, it is reasonable to ask why the economy minister of a country groaning under heavy pressure because of its public debt burden and an ongoing recession, prefers to give in London the explanations that the Spanish public might like to hear. But the substance of his statements is what is more disturbing. Because De Guindos does not clearly expound any diagnosis, or any plan of what to do. He only offers grounds for deductions, and for speculation.

We may suppose that he is thinking not of a new recapitalization, the cure-all potion that obsesses EU banking authorities, but of a rapid hike in the provisions made by each institution, which he believes are currently insufficient.

We can only guess then for lack of concreteness that the new economic team is thinking of ordering increased provisions in order to force new mergers between lenders, alongside an accelerated clean-up of "toxic" assets in banks' balance sheets.

But if this is the probable intention, certain objections are warranted. It is not a prudent policy to initiate another financial reform with trial balloons and ambiguities. The deputy prime minister explained that the Bank of Spain has been asked for new reports on this, for which reason the minister's public statements reveal more haste than reflection. A new reform requires a precise strategy, defined beforehand (the Popular Party has had months to do this) and properly conveyed to the banks and the public. But so far all we have seen are vague statements, and signs of an impatience that can only be counterproductive for financial consolidation.

Any sharp new requirement on bank provisions renders the granting of loans all the much harder, and thus favors prolonged stagnation. De Guindos and his team had better pay close attention to calculating the margin for increasing its demands on the banks, which is not very wide. All the more so, considering that real estate assets are only a part of the problem; the other, which is starting to become serious, is the shrinkage of profit margins in the banking business. The few decisions so far adopted by the team of Mariano Rajoy ? who came to office promising pro-employment policies as a way out of the crisis ? all tend to stimulate recession. It seems that this embryo of reform is headed in the same direction.