Banks and the political economy of the sovereign debt crisis in Italy and Spain

ABSTRACT

This paper sets out to explain why Spain experienced a full-fledged sovereign debt crisis and had to resort to euroarea financial assistance for its banks, whereas Italy did not. It undertakes a structured comparison, dissecting the sovereign debt crisis into a banking crisis and a balance of payments crisis. It argues that the distinctive features of bank business models and of national banking systems in Italy and Spain have considerable analytical leverage in explaining the different scenarios of the crises in each country. This ‘bank-based’ analysis contributes to the flourishing literature that examines changes in banking with a view to account for the differentiated impact of the global banking crisis first and the sovereign debt crisis in the euroarea later.

KEYWORDS:

• Italy
• Spain
• financial crisis
• banking crisis
• sovereign debt crisis
• euroarea crisis
• bank business models

Acknowledgements

Research assistance by Nina Arbabzadeh is gratefully acknowledged. Research for this paper was conducted while Lucia Quaglia was visiting fellow at the Hanse Wissenschaftskolleg. We wish to thank Tony Heron, the journal editors, the reviewers and the participants to the workshop kindly hosted by the university of Luxembourg for comments on an early draft of this paper.

Notes

1. However, Italy, like Spain, benefited substantially from the European Central Bank's purchase of government bonds in the secondary markets attempting to reduce borrowing costs. For an overview of governments’ reactions to the crisis in several countries, see Bermeo and Pontusson (2012).

2. Cuñat and Garicano (2009) have shown that cajas with politically connected chief executives with no previous banking experience and no graduate education did substantially worse in the run up to the crisis (i.e., the executives granted more real estate developer loans, up to half of the entire loan book, in some instances) and during the crisis with higher non-performing loans.

3. Spanish banks increased their ECB borrowings by more than six times between June 2011 and October 2013. In March 2012, they borrowed a record 316 billion euros from the ECB, 28 per cent of the euroarea total, the highest level in absolute terms among euroarea banking systems (Royo, 2013b).

4. This deal was subsequently investigated by Italian magistrates, following accusations of corruption and fraud.

5. The Palio is the historical bareback horse race in the city square of Siena.

6. Merler and Pisani-Ferry (2012) estimated that the accumulated net position of the Northern euroarea central banks reached 800 billion euros in December 2011, matched by the Southern euroarea central banks’ equally negative position.

7. The crisis has shown that Spain's structural or cyclically-adjusted deficit was much higher than its actual deficit. So the reported excellent figures disguised the truth. The problem is that it is very difficult to know the structural position of a country. Even the IMF, an international prestigious institution that cannot be accused of being controlled by the Spanish government, erred; in 2008, it reported that that Spain had run a substantial structural – or cyclically-adjusted – fiscal surplus in 2004, 2005, 2006 and 2007. Yet, in 2012 it reviewed the date and reported that it had, in fact, run a substantial structural deficit (Royo, 2013c : 127–8).

8. See Ángel de la Fuente, ‘Las cuentas autonómicas en perspectiva’, El País, 16 April 2013, p. 33. See also ≤www.fundacionsepi.es/ciea/ciea.asp>.

9. Reported by the BBC, <www.bbc.co.uk/news/business-18058270> on 4 May 2012.

Additional information

Notes on contributors

Lucia Quaglia

Lucia Quaglia is Professor of Political Science at the University of York, UK. Her most recent research monographs are: The European Union and Global Financial Regulation (forthcoming with Oxford University Press), Governing Financial Services in the European Union (2010) and Central Banking Governance in the EU: A Comparative Analysis (2008), both published by Routledge. Together with Kenneth Dyson she published two volumes: European Economic Governance and Policies (2010), OUP. Together with Dermot Hodson, she was the guest co-editor of the 2009 special issue of the Journal of Common Market Studies on ‘The Global Financial Turmoil: European Perspectives and Lessons’. Quaglia's articles have appeared in: New Political Economy, Governance, European Journal of Political Research, Journal of European Public Policy, Journal of Common Market Studies, West European Politics, Comparative European Politics, etc.

Sebastián Royo

Sebastián Royo is Vice Provost and Professor of Government at Suffolk University in Boston. He is co-chair of the Iberian Study Group at the Minda de Gunzburg Center for European Studies-Harvard University. Royo's articles and reviews have appeared in: Comparative Political Studies, European Journal of Industrial Relations, PS: Political Science and Politics, West European Politics, South European Society and Politics, Democratization, Mediterranean Quarterly, SELA, FP, and Perspectives on Politics. Books include From Social Democracy to Neoliberalism (2000), A New Century of Corporatism? (2002), Spain and Portugal in the EU (with P. Manuel, 2003), Portugal, Espanha e a Integração Europeia (2005), Varieties of Capitalism in Spain (2008), Portugal in the 21st Century (2011), and Lessons from the Economic Crisis in Spain (2013).