Spain, Six Years Later

First of all, I would like to thank the Credit Slips team and, in particular, Bob, for hosting me here again. I guess that after six years, memory is weak, and it is easier to believe that I could have something interesting to share with their readers. I hope that, at least, my posts will help to understand the present situation of Spanish Insolvency Law as regards personal bankruptcy. The latest amendments are said to be a dramatic change in our system. My personal view, however, is not so optimistic, as it looks more like window dressing.

Six, almost seven years ago, I wrote here:

The situation described above could change somehow, as the increment in individuals' indebtedness and the eventual problems faced in case of an economic downturn could push politicians to pass a law for consumer bankruptcy or a reform in the insolvency law. But if it were the case, the discussions will probably focus on mortgages, as it can be clearly seen in how trade unions or consumer associations speak about this question right now. That situation will undoubtedly be a test for the bank and credit industry power in our society.

What happened since then?

Spain 2007-2013. Unemployment rate is right vertical line

Since 2007 and especially since 2008, the situation of the Spanish economy worsened dramatically,with a deep effect on unemployment rates (the provisional rate is 26% for 2013) and on insolvency rates, as shown in the graph. Even with a strong social safety net ( albeit very weakened during these years due to the cuts in public budgets), the situation affected deeply the financial situations of families and individuals. The answer to the second part of the question, i.e., how the legislators have reacted, is a different story.

I should say that my intuitions where right in this regard. The main concern has been the situation of mortgage debtors in difficulties. At the same time, even in this highly sensitive issue in the Spanish society, the legislature has moved very slowly and in a very conservative way. Although the measures to give some relief started in 2008, with a timid attempt to offer solutions to mortgage debtors, the process stagnated until 2012 (except a minor change in 2011). In hardly twelve months (between March 2012 and May 2013), three different legislative acts were passed to provide some solution for mortgage debtors in difficulties. These attempts included different tools, ranging from a foreclosure moratorium to special restructuring schemes including a watered-down deed in lieu of foreclosure. I will not go into greater detail, leaving it to comments or, if necessary, to a different post, but in my opinion this intervention was intentionally timid and driven mainly by the pressure of public opinion. In this process, the ECJ preliminary ruling on the well-known Aziz case was, undoubtedly, crucial, even not being a substantive question but a highly technical procedural problem. The low technical quality of the different rules and the following amendments as they proved almost useless and confirm my previous characterization of this very conservative approach as a minimally interventionist policy. In the end, I guess that my thoughts in 2006 about testing the power of the bank and credit industry have led to a conclusion after the experience of these years.

In contrast, the need of amendment of the Spanish Insolvency Law to introduce a personal bankruptcy model received much less attention and seemed more comfortably placed into the boundaries of the academic circles. Although the legislators were aware of the problem and different attempts were made since the Insolvency Law was passed in 2003, there seemed to be no political urgency. Consequently, in the two amendments of the Insolvency Law in 2009 and 2011 (clearly forced by the crisis and its effect on bankruptcies) personal bankruptcy was not included and the compromise for a reform in this matter was not honored. This state of affairs continued until last summer, when, using a law about entrepreneurship, the Spanish legislature amended the Insolvency Law of 2003 to include a so-called discharge for individuals in bankruptcy. Why now?

Unlike other European countries in similar situations, Spain?s bailout was limited to the financial sector. Therefore, no provisions could be found in the MoU equivalent to the ones present in Portugal or Ireland regarding personal insolvency and ?fresh start? rules. However, I would not discard the important role that international institution recommendation could have played in the amendment of the Spanish Insolvency Law and the introduction of this discharge in 2013. In particular, the August 2013 report of IMF for Spain. Although the law was being drafted before the report was made public, it seems a big coincidence that the amendment was passed right after that IMF country report highlighted the absence of a fresh start for individuals and recommended in page 29 the introduction of a personal insolvency regime. This is just a guess as there is no express link and the motivation of the 2013 Law does not mention the IMF or other institutions? recommendations. But I think that it might not be far from the truth. Being so, one should think that the lacks and flaws of the new regulation may be the consequence of trying to comply formally with the recommendation, without amending our system in a very substantive way.

Comments

[Jason Kilborn]

Thanks for this update! I very much look forward to hearing more about the "so-called discharge." Personal insolvency systems come in many shapes and sizes, as we know, and if the discharge is made less available or less effective somehow (as we've seen all over Europe), then the wait will continue for the IMF 's desired fresh start. Too bad Spain didn't do as Colombia did and rely on the World Bank's report to support entry of an effective discharge.