Yesterday I mentioned how I thought Italy would ‘find’ some debts it had somehow not noticed in its cities and municipalities. And today Spain shows how it’s done. The Wall Street Journal reports how the Spanish region of Castilla la Mancha, when its new regional government audited the accounts found that the real debts were more than TWICE what the outgoing government had claimed.
Everyone has ‘known’ the Spanish regions were lying. Everyone except the Spanish government and Central bank that is who both claimed it was all declared and there was nothing at all to worry about. Spain they loved to say, was not Greece. No it’s not. It’s bigger and much, much worse. Only Italy would be worse for Europe’s banks. And this revelation says to me that Italy might well have worse in store.
How was it done? Easy actually. It’s a trick as old as accounting and Italy is doing it. You hide debts by calling them unpaid invoices. It’s not that someone has defaulted, they just haven’t paid you yet. Which simple logic means you can take what will definitely be a loss and not only put off declaring it as a loss, but actually count it as an asset for as long as you can keep up the charade.
You see until the moment you absolutely cannot hide the truth any more that the debt is not ever going to be repaid, until that moment, when you or the person who owes you is officially audited, you can keep insisting that this is money you are owed and as such it is an asset about to come in. It is very much like saying the parrot is not dead, he’s just resting. Any moment now he’ll get up and give us a blast of song. Any moment… any time now that debt will be paid.
That is what the Spanish regions have been and still are doing and it is what I firmly believe the Italian cities and regions are doing as well.
You see international busy bodies pry in to national accounts like you wouldn’t believe. But regions, well they are too numerous, too small, too far away, have no five star hotels handy for IMF teams and have, shall we say a ‘close relationship’ with local auditors and banks. Regions and cities are the place of choice for nations to hide debts.
Which means there is a vast amount of debt still to be declared.
Expect Spain to join Italy in bond and CDS hell tomorrow and for the ratings agencies to start to mutter about downgrades for regions, cities and the nations who have been using them as hiding places.
This week should continue to provide a surround sound experience of lying and dissembling.
A crystal clear explanation Golem – thank you.
I always enjoy reading the quality writing here.
Yes. Lying dagoes! But that suggests that they were consistently lying for some time, like the Greeks.
Some cleansing will be required! Implications for Ireland are slightly positive? They only lied about their regulation of the banks, not debt levels. But NAMA constitutes an attempt to keep asset levels high in a depression market, so that is another way to lie about net worth, isn't it!
This is also what UK banks are doing.
There is a steaming pile of debt management plans that are marked as performing debt.
I come across these abominations regularly – not unusual to have an ordinary Joe with £100k in credit card debt, paying it off at £500 per month. That could be spread over 20 creditors, and often the debt manager takes the biggest slice of the monthly instalments!
Then consider the conversion of mortgages to IO or arrears capitalisation – the UK banks are a mirage.