Back-door currency printing in Spain: converting deferred tax assets into tax credits

Late last year, the Spanish government made what they claimed was a “minor accounting change” by allowing banks to convert a lot of their deferred tax assets into tax credits.

Here’s an example of what this means:

Bank lends 1 million euros to shady real estate developer, who subsequently runs off with the money, leaving the bank with nothing. Well, almost nothing. Since the bank just lost a million euros, it could deduct this from profits in later years, saving itself up to a million in taxes at some point in the future (as long as it doesn’t go bankrupt first).

The problem is that if you are facing bankruptcy, a potential future tax write-off isn’t worth very much, since it’s only useful if you don’t go bankrupt in the first place.

What the government did was to transform these future tax write-offs into actual tax credits. The catch is that these tax credits can only be claimed from the government if the bank actually goes into liquidation, or in 18 years.

Does this count as new government debt? I suppose if the banks somehow claw their way back to profitability in the next 18 years, maybe, but it’s a big hole to climb out of (40% of CatalunyaCaixa assets are these “deferred tax credits”).

However, the challenge is on to see if with sufficient financial engineering, the tax credits can be extracted at full value. Of course, this has to be done with enough cover so that the government can still claim that these credits aren’t actually government debt, which probably explains the various failed attempts to sell these banks.