No government, no problem.

By Don Quijones, Spain & Mexico, editor at WOLF STREET .

With all the world’s attention focused on the slow-motion disintegration and belated — and possibly ill-fated– “rescue” of Italy’s financial system, other somewhat smaller but nonetheless important crises are going unnoticed in Europe’s hinterlands. They include the gathering problems in government-less Spain.

Last time Madrid had an elected government was 232 day ago. Even after a second round of elections in June, there is no guarantee that Spain’s two major parties, the Popular Party (PP) and the Socialist Workers’ Party (PSOE), will find enough common ground to form the so-called Grand Coalition that the country’s banks and corporations have their hearts set on. And without that, a third round of elections, in December, is almost inevitable.

The task of setting a stringent, Troika-approved budget for 2017 — by far the European Commission’s biggest priority for Spain — will have to be put on ice, just at a time when the country’s public debt remains perilously close to record highs. According to the Bank of Spain’s raw figures, i.e. before “adjustments,” Spain’s total debt surpassed €1.5 trillion euros at the end of the first quarter of 2016. That’s over 140% of GDP, more than triple what it was in 2007.

Political chaos and growing public indebtedness are not the only problems Spain faces. There is also the issue of internal strife in the country’s central bank. Over the last 15 months external investigators have probed the Bank of Spain’s role in the approval of allegedly fraudulent financial statements in the run-up to Bankia’s highly dubious IPO, in 2011, which ended up costing retail and institutional investors billions of euros. This, together with internal disagreements over how best to implement new ECB regulations, has sparked a mini mutiny among the bank’s inspectors and middle managers.

In June a large group of the bank’s employees sent a joint communiqué to Bank of Spain Governor Luis Linde bemoaning the acute lack of tools and resources available for conducting “effective supervision” of the financial sector. Unless remedied, the letter warns, the situation could lead to yet another financial crisis.

Linde responded with an internal memo in which he lauded the bank’s efforts to harmonize its traditional “rigor” with the new requirements established by the ECB. He also rejected any suggestion that the ECB’s Single Supervisory Mechanism was “ineffective.”

Last week, the internal power struggle claimed its first victim with the resignation of Fernando Restoy, the bank’s deputy governor. Restoy was widely considered to be the real boss at the Bank of Spain. It was Restoy, and not Linde, who oversaw the complete restructuring of Spain’s saving banks in the wake of the crisis. Restoy was also president of both the Deposit Guarantee Fund (DGF) and Spain’s Fund for Orderly Bank Restructuring.

But now he’s gone, having departed last week for a job at the central-bank-owned, Basel-based Bank for International Settlements (BIS) – “a bank for central banks,” as it says – where he’ll be working directly under his former boss and now BIS General Manager Jaime Caruana.

Meanwhile, in Spain the banks continue to exhibit signs of strain. Just today, the National Securities Market Commission (CNMV, Spain’s financial markets regulator) requested additional financial information from eight of the 35 companies listed on the country’s benchmark index, the IBEX-35. They include Spain’s biggest bank, Santander, and its biggest ever rescued bank, Bankia.

The financial regulator has asked for clarification on how the banks formulated their accounts as well as more data on their valuation of certain assets and liabilities, reports El Economista. This adds to fears about Santander’s financial health just weeks after the firm’s U.S. subsidiary, Santander Consumer USA Holdings Inc., the country’s largest subprime auto-lender, delayed its Q2 results, purportedly due to “certain accounting matters primarily related to the Company’s discount accretion and credit loss allowance methodologies.”

At almost exactly the same time, former JP Morgan Chase starlet Blythe Masters resigned as the company’s non-executive chairwoman, after less than a year on the job.

If the CNMV is now flagging up Santander’s latest results, then something serious must be amiss. After all, this is the same regulator that has been repeatedly caught sleeping on its watch, in open-and-shut cases like Bankia, Gowex and OHL. It was even shown up by a 17-year old student, who in his final-year school project detected serious flaws in the accounting of Abengoa, Spain’s biggest ever bankruptcy, three years before they came to the attention of the CNMV’s army of officials — and that was only because Abengoa’s auditor, Deloitte, finally refused to sign off on the company’s accounts!

Now, after eight months of negotiations with its creditors, Abengoa is seemingly back on its feet. Granted, seven thousand jobs have been lost along the way, most of them in Spain’s southern region of Andalusia where unemployment is already at a staggering 29%. Many of Abengoa’s most profitable business operations have also been sold off and its stock now belongs mainly to international hedge funds. But for now, the firm is alive.

The one thing that no one seems to notice — because no one wants to tell them — is that Spain’s taxpayers were once again left on the hook, this time for €250 million worth of government guarantees. The government is also considering allowing the participation of the state-owned Official Credit Institute. In other words, if things go sour, which is more than possible given that Abengoa now represents a shadow of its former self and the interest it must pay on its new debt is around 15%, the company’s new creditors will be cushioned from the pain by Spain’s eternally generous but never, ever consulted taxpayers. And all this without an elected government. By Don Quijones, Raging Bull-Shit .

OHL, one of the largest global construction companies, has equally escaped scrutiny of Spanish regulators. But investors smell a bigger rat, beneath the bad numbers. Read… Despite Shady Accounting, Construction Giant Suffers Rout

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