Crony Capitalism At Work------$29 Billion “Green Energy” Boondoggle Flops in Spain

 

$29 billion Vaporized

As is well-known, Spain is one of the countries in the euro area’s periphery that has been thoroughly bankrupted by its decision to join the euro area and enjoy an artificial credit expansion-induced boom as its interest rates initially collapsed. This was aided and abetted by the ECB, which sat idly by as the euro area’s true money supply exploded into the blue yonder with annualized growth rates ranging from 6% to 18% during the boom years.

 

Abengoa solar plant towerTower at Abengoa solar plant in Sanlúcar la Mayor, near Seville in Spain.

Photo credit: Marcelo Del Pozo / Reuters

 

 

And why not, the bizarre “inflation target” set by the bureaucrats was after all almost hit most of the time (HICP annualized growth actually fluctuated between 2% and 4% during the boom period, so they missed their target “slightly”). Currently the ECB is trying to make up for this faux-pas, by redistributing wealth from the region’s battered savers to its over-indebted governments and insolvent banks by means of expanding the money supply even more and suppressing interest rates well into total economic perversion territory.

 

Euro area TMSEuro area – annual money TMS growth rates during the boom period (in the green box) – click to enlarge.

 

This strategy will “buy time” and ensure that assorted bankruptcies will eventually turn out to be even more profound and devastating than they might have been otherwise. But who are we to criticize our well-versed central planning bien pensants? Haven’t they proved over and over again what geniuses they are?

In the meantime the fall-out from the preceding boom-bust sequence continues to make landfall, and not surprisingly, one of the capital-wasting boondoggles most beloved by Europe’s central planners, social engineers and wealth redistributors has just crashed and burned in Spain.

This lengthy intro was necessary to properly set out the background: since Spain’s government and banking system are de facto insolvent and their temporary rescue has been tied to conditions, Spain can no longer subsidize many of the pet projects of social engineers and the vast hordes of cronies they have hitherto kept in bread by enlisting the involuntary help of taxpayers. In a way, it is a case of socialism running out of people to loot.

Solar energy has surely come a long way in recent years, as technological progress has undoubtedly improved its economics. Evidently though, the improvement isn’t sufficient yet to make it actually viable. One would think that it makes sense to deploy it in places that are sunny most of the time (such as, well, Spain), but even there, it evidently depends on subsidies.

People often forget that it actually costs energy to produce solar panels. Whether they will in turn produce enough energy during their lifetime to make this investment viable remains questionable. It remains questionable precisely because so many companies in the sector depend both directly and indirectly on a vast variety of government subsidies (including the introduction of inane trade barriers to the detriment of consumers).

With the subsidization scam in Spain reaching its limit, it turns out that not even sunny climes can keep solar boondoggles afloat. In the current case, a cool $29 billion (€17.3 bn.) in liabilities have just been exposed to intense vaporization danger, as “green energy” company Abengoa has finally filed for bankruptcy.

It is the by far biggest bankruptcy in Spain’s history. 24,000 employees will have to look for a new job. The sovereign wealth fund of oil junkie Norway holds 2.7% of the company’s shares, an investment it will now have to write off. More than 200 banks are creditors of Abengoa, with total exposure of €20.2 billion. Abengoa’s business activities are described as “renewable electricity generation, converting biomass into biofuel and desalination of seawater” – practically a what’s what list of businesses that cannot possibly survive without subsidies.

Abengoa incidentally provides an excellent illustration of Austrian Business Cycle Theory, as more than 20 giant ongoing construction projects the company has initiated will remain incomplete. These empty shells are testament to the fact that there is a big difference between money and real capital. Banks and investors had no problem providing the company with money (much of it created from thin air), lending it huge sums. But the economy’s pool of real funding has proved unable to support the company’s investments.

 

Abengoa, weeklyAbengoa, weekly. Oops! – click to enlarge.

 

Inconvenient Truths and Inconvenient Timing

Although Abengoa will be excluded from the IBEX-35 Index as of today – after losing 70% of its value since Wednesday alone (“survivor bias” strikes) – its management is apparently still “not giving up hope”, as the European press reports. How come the company’s managers remain hopeful?

It turns out that Abengoa is “tightly interwoven with politics and the political class in Spain”. What a surprise! Reportedly it is “primarily the ruling conservative Partido Popular of Mariano Rajoy for which the mega-insolvency comes at a highly inopportune time”.

This appears to be a case of poetic justice. As an aside, it also serves as a reminder that so-called “conservatives” in Europe (and not only there) are in reality socialists as well, only of a slightly different type, with a different redistribution focus; the entire system is socialistic in its basic outlook. And they are of course specialists in cronyism and running the consumer and taxpayer looting scheme widely referred to as the “state capitalist” system. The fee market gets lip service at best.

 

King and CEOEven Spain’s king was roped in. King Juan Carlos (fourth from left) walks with Abengoa Chairman Felipe Benjumea in front of solar panels during the inauguration of a solar tower in southern Spain.

Photo credit: AP Photo

 

Citi Group has been greatly embarrassed as well. It has been the lead underwriter raising fresh capital for Abengoa at €2.80/share in July – a mere four months ago. As the Guardian reports:

 

Days after the Citi-led share sale in the summer, the Spanish company revealed it was seeking to raise €650m of capital and dispose of €500m of assets. Then it alerted the market that its free cash flow for the year would be as much as €800m lower than previously forecast.”

 

Whoa! This actually sounds like fraud to us, but one must keep in mind that this approach to ripping off investors seems to be par for the course in Spain, as demonstrated by various sagas that emerged during the banking crisis (Bankia and its callous capital raising activities robbing widows and orphans – most of them its own clients – being a prime example). As one industry observer drily commented:

 

“One banker said on Wednesday that Citi had made a “big, big mistake”, promoting the share sale without having more information on problems that lay ahead.”

 

No kidding baby.

 

US taxpayers are on the hook as well in this “Spanish Solyndra”. According to the US media:

 

“When the Free Beacon interviewed a pair of former Abengoa managers last year, one predicted that the company would go under. “This company eventually will go bankrupt. The question is at what expense to the United States people and government,” said Mike Alhalabi, formerly the senior lead mechanical engineer at Abener, a subsidiary of Abengoa.

The cost to U.S. taxpayers could be enormous. Abengoa has received nearly $3 billion in loan guarantees from the Department of Energy, as well as more than $100 million in federal grants.

Both the Department of Labor and U.S. Immigration and Customs Service have been tight lipped about the investigations, but Alhalabi and other former Abengoa employees have alleged extensive violations of U.S. labor and immigration laws and the terms of their stimulus loan guarantees that required them to give priority to American job applicants.”

 

(emphasis added)

 

cartoon-grants-solar-energyA great opportunity for young entrepreneurs …

 

That assorted bureaucrats are “tight-lipped” about the investigations should be no surprise. They first need to make 100% sure that their behinds are covered. After all, “green energy” is a major pet project of the zombie faction currently running Washington. A wise bureaucrat will avoid drawing its ire and seek ways to use the boondoggle’s discovery to increase his bureaucracy’s power and funding.

Reaping great reward is after all the usual outcome of bureaucratic failure, as inter alia consistently demonstrated by the “national security” apparatus and the monetary authority. More on the consequences of Abengoa’s insolvency for US tax serfs can be read at “watchdog.org”.

 

Conclusion

Businesses that cannot possibly survive without subsidies are ipso facto not economically viable. In spite of all the high-minded pronouncements about the “need to save the planet” and how this valiant effort can allegedly be “combined with economic growth”, their existence serves primarily one function: to distribute money looted from taxpayers and consumers to assorted cronies of the political class, who in turn provide the latter with kickbacks. That is all there is to it.

 

Green-EnergyHow it works, in one picture.

 

Surely no-one is so naïve as to believe that modern-day politicians, whose horizon and time preferences never stretch beyond the next election date, are really concerned about what might happen to the planet a century hence (not to mention that the entire “climate change” religion seems to be little more than an elaborate hoax). With Abengoa’s bankruptcy we are once again presented with a bill that serves as a stark reminder how much scarce capital has been wasted on such schemes.

Ultimately it is little more than a modern form of highway robbery, clad in highly effective propaganda. Many people feel guilty about “consumerism”, believing that it must be true that prosperity and progress are somehow sinful. In reality, environmentalism has long become the home of a great many authoritarian leftists after they lost their former sugar daddy in Moscow in 1990.

They are trying – very successfully it saddens us to admit – to undermine free market capitalism by appealing to people’s sense of guilt and their innate need to receive absolution for their sins. And they have of course found out that their new sugar daddy is much better than their old one, as there is far more wealth ready to be looted and everybody involved is quite happy to get a cut. Occasionally reality has a habit of interfering, but that won’t stop them, at least not yet.

It is high time that the victims wake up to these scams and begin opposing them.

 

Charts by: ECB, BigCharts

 

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.