EU in Subordination Damage Control

The last thing Spain needs is rising bond yields as they are already at the unsustainable that has sent 3 other countries looking for a bailout as they were locked out of the credit markets. The news that the Spanish Bailout would be senior to any other debt (bond holders subordinated) did exactly what one would expect, sent bond traders scrambling to dump Spanish bonds as you saw the Spanish and Italian 10 year yields popping higher this morning.

In essence, that one little statement about the bailout being senior to other debt may have created the start of a transition or deterioration from a Spanish bank bailout to a bailout of Spain itself which everyone knows would be the final domino with Italy likely to be right there with Spain. So now the EU is in damage control mode.

Coming across the wires:

• SPANISH BANK RECAPITALIZATION LIKELY TO BE IN EFSF BONDS, SIMILAR TO GREEK RECAPITALIZATION - EU OFFICIAL
• EUROZONE MONEY FOR SPANISH BANK RECAP COULD COME FROM EFSF TO AVOID THE ESM'S PREFERRED CREDITOR PROBLEM - EU OFFICIAL
• SPANISH BAILOUT COULD LATER BE TAKEN OVER BY THE ESM, BUT EXTENDED LOANS WOULD NOT BECOME SENIOR TO OTHER DEBT

This is just so typical of the EU, their grand plans always fall short; they never consider the repercussions and they never have details as to how the plans can be carried out. Remember the leveraging of the EFSF to over a trillion and they couldn't cover a $3bn bond issuance?

Of course there are a ton of problems with using the ESFS, first money! Second, countries like Finland demanding collateral which at this point in the Spanish banking sector is likely non-exisitient, unless Finland wants warm and sunny Ibiza. Any time the EU scrambles like this they just create more unintended consequences.

Today's EU circus doesn't end there though...

From Bloomberg...

"German Finance Minister Wolfgang Schaeuble wants aid for Spain’s banks to come from the future permanent backstop, the European Stability Mechanism, to avoid greater risks for the German budget, Handelsblatt said."

Spain would not be able to guarantee loans from the current backstop, the European Financial Stability Facility, if funds for its banks came from the EFSF, the newspaper said, citing European Union diplomats it didn’t name.

Germany’s share of guarantees to the EFSF would rise in such an event, the newspaper said. The ESM is financed by all 17 euro-region countries, including those that receive funds from it, the newspaper said.

We all know who runs the show in the EU, so there's the answer from the horse's mouth, ESM it is.

Now remember is the Week Ahead post, the talk about how all of this does nothing but strengthen Syriza's position in the upcoming Greek elections? Well it seems the EU has considered that as well (as a Greek exit would only be likely with a Syriza win) with this story out of Reuters

Exclusive: EU floats worst-case plans for Greek euro exit: sources

BRUSSELS (Reuters) - European finance officials have discussed as a worst-case scenario limiting the size of withdrawals from ATM machines, imposing border checks and introducing capital controls in at least Greece should Athens decide to leave the euro.

The story is much longer, but I think the first paragraph sums it up nicely.

EU Bazooka's and unintended consequences, it NEVER, EVER fails.