Between Collateral Damage and Caja Blues

Between Collateral Damage and Caja Blues: Investor Loyalty, Financialization and Austerity Cornel Ban (Boston University) 1 Introduction Much of the existing literature on austerity argues that the pressure to rebalance was pivotal for the adoption of austerity policies (see Ban 2013 for an overview). But missing from this explanation is the story of why the sudden stops of financial capital flows occurred in the first place and how these sudden stops worked to narrow the policy space towards austerity. The paper argues that the key to the explanation is in the political economy of the shift to market-based finance and the resulting interdependencies between banks and sovereigns left the bond markets of Eurozone member states increasingly vulnerable to sudden stops in the capital flows that deficit countries depended upon. Without explicit central bank support, sudden stops pressure governments to adopt fiscal consolidations that hurt their growth prospects, debt sustainability and socio-economic rights. The transformation of government bond markets into collateral markets has been one of the Great Transformations of the European economy. By building on existing research on financialization, this paper suggests that this transformation contributes to new, and pathological, institutional interdependencies between governments and their banking sectors that recent contributions to the political economy of global finance capital have overlooked.1 In turn, these interdependencies open space for coercive politics deployed by international lenders of last resort. Specifically, the paper suggests that sovereign risk affects banks’ funding conditions such that banks’ loyalty towards foreign or own governments is closely tied to the collateral (and safe asset) qualities of that debt. Changing perceptions of collateral quality forces governments to adopt fiscal austerity unless central banks commit to reverse the sudden stop. Absent a central bank willing to do so, as countries in the Eurozone have found out, and austerity appears as the only policy solution. The findings advance scholarship on how finance constrains state sovereignty during crises (Streeck, 2014) the importance of repo markets for market-based banking (Hardie et al., 2013; Gabor and Ban 2015) and the political economy of austerity (Blyth 2013; Jessop et al 2015). To put this argument in a more concrete national setting, we zoom into the case of the Spanish financial and fiscal crisis. Spain was chosen for its critical case properties: one of the lowest public debt levels before 2008 and the most prudent banking regulations. In short, Spain a least likely case for a financial-fiscal doomsday loop. The Long Design of a Slow Burning Crisis While for the previous literature a sudden stop still remains a black-boxed exogenous shock, Gabor and Ban (2015; 2016) showed that the workings of the black box can be 1 For a review of the main contributions to this literature see Deeg and Sullivan 2009. , 2 gauged from the shifting perceptions of banks’ collateral managers about sovereign risk and their incentives to be loyal or not. These perceptions did not emerge naturally, however. Instead, they had been engineered by specific political choices at the summit of the EU policy space, against the background of a transforming European financial sytem. One of the challenges of transnational banking in the increasingly deregulated European financial markets of the 1990s was that the boom in the repo markets could not be supported by the conservative fiscal stance of the primary ‘safe sovereign’: Germany. (Bolton and Jeanne 2011). Indeed, Germany could not generate enough debt relative to the dramatic increase in demand for this primary risk mitigation instrument. This supply bottleneck could only be removed through a transnational regulatory intervention that would make the government bonds of other EU member states eligible for collateral functions on a par with German ones. The EU institutions that had the mandate, the epistemic capacity and, most importantly the ideological proclivity to do this were the European Commission and the European Central Bank. During the late 1990s the European Commission began to institutionalize a public-private policy-making regime. In it, the Commission’s directorates specialized in aspects of cross-border finance and the private sector drafted the relevant directive in a coordinated fashion. From within this regime, the financial sector demanded measures to increase the supply of collateral through the integration the wholesale money markets and sovereign bond markets. Specifically, in 1996 the Commission summoned a group of financial market experts to advise it on financial market issues (Summe 2001). The group was made out of 54 representatives of large financial institutions, bank lobbies and clearing houses, with Commission and ECB representatives also in attendance. The Commission’s finance body (DG ECFIN) provided the secretariat and the financial sector deployed a high-status chairman for the advisory group: Alberto Giovannini, a man who was more than a Milanese banker and a kind of transatlantic public intellectual whose name looms large in the community of European financial and macro economists (Alesina and Giavazzi 2010).2 Along the way, the Giovanning Group’s work was strongly supported by another epistemic community that was part of the financial industry: the European Financial Market Lawyers’ Group, the International Swaps and Derivatives Association (Rudolf and Keijser 2006: 62) and other expert groups (Ciampolini and Rohde 2001). Critically for our discussion, in 1997 the group issued the report on the redenomination of national debt into euro and the establishment of common bond-market conventions for the EZ. The report was well received by the Commission, who asked for more. In 1999 the same group delivered a report on cross-border repo markets that expanded the boundaries of financial integration in concrete terms. In it, the Giovannini Group Endowed with an MIT PhD in economics, he taught at Columbia University between 1983 and 1995 but subsequently he made good use of the lucrative opportunities awarded by using the revolving door between the public sector and the financial industry by working as the manager of Italy’s international debt at this country’s Treasury, senior strategist at Long-Term Capital Management and Deputy CEO of Banca di Roma. While acting as the Chairman of the Giovaninni Group, he introduced himself as the founder and CEO of an asset management company based in Milan (Unifortune Asset Management SGR). 2 3 advocated for a bolder vision of a financially integrated Europe by arguing in the preamble to the report that “There are many areas where the introduction of the single currency alone cannot be sufficient to induce the degree of integration and efficiency of financial markets that is needed for the development of the European economy. […] In an area characterised by a single currency, old rules and market architectures may be unsuited to the task and become instead the main obstacles to the attainment of a higher degree of efficiency. The repo market is a perfect illustration of this problem. Repo markets are important both for the conduct of the single monetary policy and for the efficient use of collateral” Therefore, these financial sector experts indicated the institutional obstacles to a integrated repo market that would enhance the liquidity of securities markets by uniting the 15 largely separate repo markets in existence at the time. According to legal scholars who specialize in EU financial law, the 1999 report the Giovannini Group wrote on the use of collateral in the Eurozone was the very framework for the Collateral Directive (Lober and Klima 2006; Rusen 2007). Beyond policy design, Giovaninni was involved in enforcement as well. A standing group of industry experts and EU officials – the Clearing and Settlement Advisory and Monitoring Expert Group – CESAME – was established to monitor efforts to eliminate the barriers identified in the report and provide technical input to the Commission’s thinking on matters relating to clearing and settlement. Alberto Giovaninni was the principal Policy Advisor of the Commission’s Clearing and Settlement Advisory and Monitoring Group (CESAME). Throughout the crisis, the barriers to further financial integration were talked about in ECB reports as the “Giovannini barriers” (ECB 2012). In part, this reliance on financial sector expertise reflected the Commission’s attempt to secure the professional skill sets needed to “read” the financial sector’s understanding of how the financial markets of the Eurozone should work. This is not an unusual practice in the light of recent moves made by other IOs who feel that the complexity of financial regulation requires such skills (Seabrooke and Nilssson 2013). But what stands out is that while in other areas of EU policy such as the rule of law or the environment the Commission makes an effort to open up the drafting of legislation to other stakeholders, no such due process was observed in this case. Instead, between 1997 and 2010 the Commission basically asked the financial sector represented by the Giovannini Group to be the agenda setter in the integration of wholesale and collateral markets and beyond.3 In line with this diagnosis, the report proposed the vision of a Europe where banks 3 The work of the Giovaninni Commission (1996-2010) started from the observation that although the single market is in place, financial markets in the member states still reflected their national origins and, to varying degrees, remained fragmented. Therefore its mandate was the harmonization of rules, regulations and practices to complete EU financial market. In five reports drafted between 1999 and 2003 the GC asked for a long laundry list of reforms in cross-border finance ranging from the adoption of the same systems of national clearing and settlement to security issuance practice. These were new institutions and calculative devices meant to enable financial actors to extend their reach beyond their home country. 4 would freely move collateral and cash across borders and where market practices for managing collateral risk and legal and fiscal frameworks would be harmonized. Crucially, the report promised that an integrated repo market would maintain the momentum for financial integration that EMU had created, but could not deliver on its own. The interactions between repo and collateral markets would increase liquidity in securities markets used as collateral, paving the way for the genuine integration of EU capital markets. As showed in Gabor and Ban (2015), the Commission quickly turned the report’s main recommendations into institutional reality. The 2002 Collateral Directive provided a unified legal framework for the crossborder use of collateral which steamrolled the domestic institutions that governed national repo markets, while refraining from EU-level regulatory interventions or supervisory oversight. By stressing that market practices would strengthen financial stability, the Commission effectively institutionalized pure market-based governance in this area. The same authors showed how for different reasons, the Euro area member states followed suit and so did the ECB. Critically, The ECB used its collateral framework – the terms on which it lends to banks – to encourage repo market participants to Europeanize sovereign collateral – that is, to treat all EMU sovereign bonds as identical collateral. In effect, even the ECB’s medium and long-term refinancing operations (LTROs) – through repo operations, lending to banks against collateral form came to form an essential element of its monetary policy. As a result, by 2008, the European repo market was structurally intertwined with European government bond markets. Around 75 per cent of repo transactions use government bonds as collateral. This systemic transformation taking place at the heart of state-finance relations in Europe came to haunt peripheral economies who had kept their fiscal house in order, such as Spain. Caja blues Financialization and systemic fragilities in pre-2008 Spain With currency risk gone, during the 2000s Spain experienced a quick convergence of its interest rates to German ones (real interest rates dropped by ten points by 2005) just as credit and collateral conditions loosened up. The conservative (PP) and center-left (PSOE) governments maintained their “sound finances” record on public debt and deficits but were complacent with high levels of private debt and a remarkable property bubble via easy consumer credit, mortgage loans, and loans to property developers intermediated by Spanish banks. A critical vulnerability of this development was that much of this intermediation was serviced by the cajas, savings banks over whom regional governments had regulatory authority. Prudently, the central bank (BdE) had limited their operations within the region, but the 1992 EU Directive on Banking removed this regulation, allowing these parochial institutions to go national and even resort to euro- denominated wholesale funding sources on a large scale. Most of the funding thus intermediated went to real estate developers, with the significant exception of the high- productivity research sector. 5 The combination of large capital inflows and domestic institutional characteristics created one of the world’s largest asset bubbles, as cheap money met the loosening of zoning regulations. As a result, by 2005 lending for construction reached 29 percent of GDP, consumer credit was half of GDP, six hundred thousand new housing units were built every year, and real estate price increases were larger than in the United States and the UK. The asset bubble created fiscal illusions for the government as well. By 2007 Spanish tax revenue was two percentage points of output higher because of additional real estate transactions (Fernandez- Villaverde and Rubio- Ramirez 2009, 11– 15). By the mid- 2000s Spain caught the “Dutch disease.” Human capital moved from the export sector toward real estate, with increasing wages in construction increasing the dropout rate from the education system (Fernandez- Villaverde, Garicano, and Santos 2013). As labor productivity failed to catch up and with construction absorbing more and more labor and investment, Spain’s gaping current account imbalances demanded 520 billion euros in external financing between 2000 and 2009, a gap financed via portfolio debt securities and bank loans unleashed by financial integration in the eurozone (Quaglia and Royo 2013, 496). The problem with this growth model was that Spanish banks depended on international wholesale interbank funding in what had become a panEuropean market thanks to political decisions made by the European Commission and European Central Bank (Gabor and Ban 2015). From Lehman to cajas The Achilles heel of Spain’s economic model was its wobbly financial sector, hooked on ECB liquidity, and the extreme vulnerability of the Spanish sovereign to financial turbulence in a new world of European finance ushered by the euro. It is through this twin channel that overwhelming external coercion terminated Madrid’s editing of fiscal orthodoxy with Keynesian ideas. The massive post- Lehman financial deleveraging of large European banks that had financed Spanish banks before the crisis meant that these banks saw increasingly restricted access to wholesale funding after October 2008. By the spring of 2009, wholesale market liquidity for these banks began to dry up. While Spain’s large multinational banks weathered this crisis well because they could appeal to their booming Latin American subsidiaries, the cajas were not in the position to do so because their balance sheets had been particularly damaged by the bursts of the real estate bubble (Royo 2013). The crisis came to a head in April and May 2010. At that point the interbank payments system of the Eurosystem (TARGET 2) showed that Spain experienced the greatest capital outflows of all the periphery countries (around 100 billion euros). The Spanish financial sector was in fact going through a slow- motion financial stop; to top it off, most cajas effectively lost affordable access to the international wholesale markets, making exorbitant demands on government fiscal resources. In effect, a substantial part of the Spanish financial sector now depended on the policy decisions of the ECB, an institution that began to withdraw liquidity from the market in the aftermath of the Greek fiscal scandal. Critically, far from being a simple monetary 6 policy body, by the spring of 2010 the ECB had become deeply involved in coordinating austerity and structural reform surveillance systems and bailouts, making politicians in Madrid extremely nervous about the fate of their attempt to defend their policy regime. This “great transformation” of European finance and state debt enabled banks to multiply their business several times over before the crisis, but its downside was that the whole scaffolding was based on the heroic assumption that all government bonds used as collateral would keep their value as long as they were used in these transactions, an assumption that was clearly proven wrong following the Greek crisis. Since the entire system depended upon all eurozone bonds having the same value as collateral, in 2010 the dubious value of Greek bonds triggered a fire sale of periphery bonds, including Spanish bonds. As a result, collateral managers in Spanish banks were compelled to reduce exposure to lower- value bonds, even if they belonged to their own government, a trend that intensified in April and May 2010.20 In this way, domestic banks’ loyalty toward their government became closely tied to the collateral qualities of government debt, and in the spring of 2010 this quality was low (Gabor and Ban 2015). As a result, Spain had to address the disruption of collateral markets for fear that bank runs would ruin its banking system and, with it, its prospects to have local buyers for its bonds.21 Since in the view of the reigning orthodoxy the attempt to absorb these costs through expansionary fiscal policy could only make the problem worse (leading to further downgrades), the onus fell upon the Spanish government to pay the price of stabilizing collateral markets. Ultimately, the collateral damage of collateralization was austerity and “structural reforms” The consolidation state kicked in, shifting an increasing share of society’s resources from citizens to creditors while shrinking the total sum of available resources, as Streeck (2013) predicted. In this kind of crisis, there were three ways to reassure bond investors: solidarity among the members of the monetary union, the intervention of the central bank as a lender of last resort, or austerity. The solidarity campaign could have been credible only if led by Germany (Matthijs and Blyth 2011), but Germany refused to write the Kindlebergian hegemon’s checks, as some suggested (Paterson 2011) because of its domestic capacities, domestic political constraints, and entrenched ideational hostility to moral hazard (Mabbett and Schelke 2015). In these conditions, the eurobond option went nowhere (Bulmer and Johnson 2013; Berghahn and Young 2013; Crespy and Schmidt 2014). As a result, the ensemble of EU crisis management acquired a distinct ordoliberal face (Nedergaard and Snaith 2015), and until the Draghi moment the euro became a currency for which no one was responsible (Marsh 2013). Moreover, until the establishment of the ESM and the Draghi “whatever it takes moment”, the EU member states went into a phase of “culturalization” of the crisis, replete with morality tales and even blatant prejudice (Blyth 2013; Fourcade et al. 2013; Mylonas 2012; Streeck 2013; Matthias and Blyth 2015; Mathijs and Namara 2015). This situation left the ECB’s function as a lender of last resort the second- best option. Unfortunately, when the sovereign bond crisis started in the spring of 2010, the European 7 Central Bank declined to repair the damaged collateral function of “peripheral” sovereign bonds (Gabor 2013). Moreover, the ECB became the enforcer of austerity on nonprogram periphery countries like Spain or Italy by using its bond purchases as leverage. According to the memoirs of the Spanish prime minister (Zapatero 2013, 52– 107), his minister of finance Pedro Solbes (Solbes 2013, 402– 408, 424), and his main economic advisers interviewed by this author (Carlos Mulas Granados and Miguel Sebastián), Spain’s fiscal stimulus of 2008-2009 was terminated not by the reassertion of fiscal orthodoxy in the cabinet, but by external political and economic coercion enforced via financial channels. Financialization and governing by correspondence Indeed, Madrid’s resistance to EU demands for austerity proved to be no match for the combined coercion deployed by the thus transformed bond and collateral markets on the one hand and the EU. This reached new heights in May 2010, after a spring made “hot” by the Greek fiscal scandal.4 Between January and May, Zapatero watched, appalled, as the EU summits began to narrate the Greek crisis as symptomatic of a broader European debt crisis. In the process, he became convinced that the only way in which Spain could avoid losing sovereignty and a massive destruction of its public services and labor institutions through a Greek- style bailout was to acquiesce to the demands of the most powerful EU governments and the ECB. During this period, “sovereign bond downgrades triggered margin calls, prompting managers to "disloyally" head for the exits. When downgrades of “periphery” bonds rendered them ineligible or expensive to post as collateral due to higher haircuts. As a result, collateral managers in banks had no choice but reduce exposure to lower-value bonds, even if they were their own government’s. In this way, banks’ loyalty towards governments became closely tied to the collateral qualities of debt.” (Gabor and Ban 2016). The situation in the Eurozone was further complicated by the fact that in early 2010 the European Central Bank did not steadfastly commit to repair the damaged collateral function of “peripheral” sovereign bonds, as it did in 2009. Just as downgrades chipped away at the collateral value of these bonds, making investors increasingly disloyal, the ECB withdrew extraordinary liquidity interventions. In these conditions, the governments of liberal and mixed governments had to address the disruption of collateral markets for fear that bank runs would wreck their countries’ banking systems and take the national economies down with them. Since the attempt to absorb these costs through expansionary fiscal policy could only make the problem worse given these constraints, leading to further downgrades, the onus fell upon European governments and the societies they governed to pay the price of stabilizing collateral markets. The collateral damage of collateralization is austerity (Gabor and Ban 2016). 4 For an account of similar dynamics in the Eastern periphery see Ban (2013). Ban, Cornel. "From cocktail to dependence: the great recession and the transformation of Romanian capitalism." Available at SSRN 2215124 (2013). 8 As one of Zapatero’s advisers put it, “he became convinced that if you give the blood of your own people, the markets will calm down.” This point was driven home in conversations with EU heads of state (Zapatero 2013, 68– 107) and bond investors, whose short- term views and limited knowledge about Spain were striking, with their views shaped exclusively by international financial media (212– 214).5 By early May, with the cajas cut adrift from international liquidity and its commercial banks dumping Spanish bonds, the Zapatero government faced the demands of the EU heads of state and finance ministers that it make an explicit, immediate, and public statement to the effect that Spain would adopt significant deficit reductions to the tune of 3 percent of GDP (a level that was eventually bargained down to 1.5 percent), plus labor market deregulation. Acceptance of the deal would be followed by ECB bond purchases that would ease pressures on the Spanish state and, with it, on its private sector. Rejection would have meant financial collapse and a more invasive and drastic austerity carried out by the Troika. Given the power concentrated in his hands, Zapatero sealed the deal over the phone with his finance minister and, under the threat of early elections, had an austerity package focused on expenditure cuts passed in parliament after a dramatic debate, with 169 votes for the package and 168 votes against it (Zapatero 2013, 103– 105, 115– 116). A labor deregulation reform followed a month later. To better understand the context keep in mind that domestic banks were now incentivized to be disloyal to their own country: “The difficulties faced by ‘periphery’ sovereigns and banks were further magnified by the use of mark-to-market and margin calls in the ECB’s LTROs. Consider the implications for Greek and Spanish banks. Both had highly concentrated portfolios of home government bonds, a strategy sanctioned by the ECB’s earlier efforts to Europeanize collateral. As tensions eased in 2009, the ECB’s mark-to-market and daily margin calls created incentives for banks to use LTROs in order to buy (home) government bonds, push up prices and make margin calls on ECB repos. By June 2009, the two banking systems were funding 8 per cent and 2 per cent, respectively, of total assets with ECB’s LTRO repo loans, some against home sovereign collateral. Yet market tensions in 2010– 12, underpinned by the ECB’s tightening of collateral standards, increased the costs of using lower rated sovereign bonds as collateral. The ensuing fall in market price of those government bonds meant that banks had to find additional collateral to meet the ECB’s 5 Zapatero also became particularly terrified by a conversation he had in the spring of 2010 with US vice president Joe Biden, who “with a cruelty that I’ve never encountered said that the only way to get market confidence is to take decisions that make you suffer really hard … _that you are credible in a given set of circumstances if you subject your citizens to difficult tests and if unions openly reject your policies— in brief, if there are tears and suffering” (Zapatero 2013, 102). 9 margin calls. … Confronted with margin calls from the ECB and market participants, banks needed to raise funding in private repo markets against high-quality collateral such as German bunds, or sell lower-rated government bonds” (Gabor and Ban 2015: 15). In May 2010, Spain’s own translation of fiscal policy revisionism came to an end. Nevertheless, the extraordinary mechanisms of coercion that started to operate then did not nullify the entrenched tradition of Spanish Socialists and their economic experts: to negotiate a middle ground between neoliberalism and social equity. The defense of the legacy of Spain’s post-Franco mix of social democracy and neoliberalism became harder still in the summer of 2011, when sovereign bond investors unimpressed by the EU governance of the crisis launched fresh attacks. This time, the European Central Bank introduced a new coercive mechanism in its relationship with countries experiencing stress in the markets: letters to their heads of state stating what reforms were needed in exchange for the ECB buying their sovereign bonds on the open market (thus enabling local banks to buy their sovereign’s bonds). The tactic had been tested in November 2010 when the ECB president wrote to the Irish government that the ECB would stop emergency lending to the Irish banks if the government would not adopt the fiscal and structural reforms demanded by the ECB. As the risk premiums on Spanish and Italian bonds went up dramatically yet again in August 2011, the ECB chairman, Jean- Claude Trichet, went as far as sending Zapatero a confidential letter (later published by Zapatero in his memoirs) containing a complete list of specific measures the government should adopt (Zapatero 2013, 237– 268). Soon afterward, the government rushed through the parliament a constitutional amendment inspired by the German template that mandated structural surpluses. In effect, this constitutionalization of sound finance thus made fiscal revisionism illegal. This was the only time Spain had modified its constitution since the transition to democracy and the “return to Europe,” and it was no small irony that it was an unelected EU institution that cast a shadow over Spanish democracy in this way.23 In response to market and ECB pressures that conjured up to the prime minister the specter of national humiliation represented by a bailout, the cabinet also adopted a raft of market liberalization measures. In line with the state-coordinated logic of Spanish embedded neoliberalism, after organized labor and capital failed to agree on further reform, the government adopted a raft of measures that encouraged firm- level bargaining and promoted arbitration as an alternative to labor conflicts. Nevertheless, Zapatero’s government was not a free marketer on labor reform, and the corporatist institutions and proworker courts were left to handle the details. As Hopkin and Dubin showed, the devil was in the details because “the reform either delegated the development of the proposed measures to the social partners or else left the sectoral bargaining partners with the ability to limit the development of questions like firm- level opt- outs” (2013, 37). Similarly, the IMF complained that “while these reforms are positive, they fall short of the necessary ‘regime change’ and, crucially, do not address 10 the wage bargaining system. … The government should thus follow up on its commitment to take action itself and introduce a more fundamental reform, including of the wage bargaining system” (IMF 2014, 20).6 In the end, external coercion channeled through the bond markets and the ECB forced PSOE to renege on fundamental aspects of its economic doctrine weeks before the 2011 elections. Averse to the perspective of a bailout, Zapatero fell on his sword and took the party down with him, ushering the conservative PP and its leader Mariano Rajoy into power. Conclusions This paper argues that the financialization of sovereign bond markets as a critical factor in the European austerity drive. The paper shows how the politically engineered pre-crisis shift to transnational market-based, collateral intensive models of European banks’ locked banks and sovereigns together in an embrace that led governments towards austerity rather than any other instrument of rebalancing. The main value added of the paper is to show how systemic-level changes in Europe’s state-finance relations opened up new spaces of policy coercion exercised by the central bank of the monetary union. This was a political choice anchored in a specific transnational epistemic elite whose membership cut across critical sites of European governance: European banks, their accountants and their lawyers, the ECB, the Commission and academia. The international regime they created provided more collateral at the cost of eroding banks’ 6 Most certainly, the Zapatero government could have done more to shield society against the collateral damage of the European financial crisis turned sovereign debt crisis. There were no explicit objections in the recalibrated neoliberalism of the EU institutions against making large fortunes, and the most profitable sectors (banks and energy) shielded more of the fiscal burden of the adjustment. The EU orthodoxy was all about spending- based consolidation, yet in practice it never went beyond rhetorical discomfort when the Hungarian government imposed extra levies on banks even while it found itself under a Troika bailout (Johnson and Barnes 2014). Some economists pointed out that more revenue could have come from the reinstatement of the wealth taxes Zapatero eliminated in his first mandate, the reversal of all cuts in the inheritance tax adopted during the same term, and the reversal of the tax cuts he granted to individuals making more than 120,000 euros per year. His cabinet did little to tackle tax loopholes used to shelter large private fortunes and corporate profits accounting for almost two- thirds of tax avoidance in Spain (Navarro, Torres Lopez, and Garzon Espinosa 2011). In 2010, bold ideas about more redistributive taxation were advocated by some in the Economic Bureau based on emerging research disproving the conventional wisdom that spending cuts are less damaging to growth than revenue increases. José Blanco, a prominent member of the PSOE hierarchy and a cabinet member, added to this choir, stressing that not taxing energy companies further was incompatible with the green jobs agenda and pushing for capping bankers’ wages and for increasing the capital gains tax. Yet these voices faced strong opposition from the prime minister and his closest adviser (Miguel Sebastián), who feared that even a one- off levy on the banks would have further complicated the government’s capacity to roll over its rapidly rising debt. Moreover, the prime minister himself also clarified that “his progressive views did not include being excessively interventionist when it came to taxing corporations.”24 Such nondecisions highlight the fact that at the end of the day, even a government as progressive and experiment- prone as Zapatero’s was too shy to push the limits of neoliberal ideas about taxation. 11 loyalty to their government’s bonds, as the diverse investor base and the availability of alternative sources of collateral reduced the costs of exit for banks faced with sovereign risk. In sum, the Euro plus the repo turned ostensibly European lending into international lending in a common currency with disastrous results when the sudden stop occurred. When the run on repo began in the Eurozone, these systemic transformations in statefinance relations percolated deeply in how fiscally balanced countries like Spain conducted fiscal policy. At first, the crisis ushered in a recalibration of neoliberal fiscal theories with bold Keynesian ideas that pushed the limits of mainstream fiscal policy. This approach was owed to the prominent positions in the state held by Spanish economists who had been at the forefront of major intellectual shift in global macroeconomics. Given that the Spanish policy process was highly centralized and the prime minister’s transnationalized economic advisers socialized him into this synthesis of neoliberal and Keynesian ideas, between 2008 and 2010 Spain met the crisis with the largest expenditure- based stimulus in Europe. However, when the sovereign bond market crisis that struck the “periphery” of the Eurozone in the spring of 2010 brought the Spanish financial system and the fiscal position of the Spanish government to the edge of the precipice, EU-level coercive mechanisms kicked into gear alongside market-based ones, terminating this Spanish experiment. As the solutions provided by the European governance of the crisis failed to stabilize the bond markets in the “periphery” and with the ECB acting as the enforcer of fiscal orthodoxy, Spain came under extreme pressure to dismantle its attempt to shield society against the dislocations produced by the dramatic shrinking of cross-border finance. Bibliography Ban, Cornel. "From cocktail to dependence: the great recession and the transformation of Romanian capitalism." Available at SSRN 2215124 (2013). 12