"Another thing to watch are Spanish bonds as the 3% loan is far lower than the 6+% Spain is paying on 10 year debt. There are some initial report that the banking bailout via the ESM (which ironically was never supposed to be used for a direct bank bailout) may not be without conditions and those conditions may subordinate Spanish debt holders. In short, there's a strong possibility that the seeds have been sown in Spain for a Greek like PSI debt restructuring in which none other than you know who gets stiffed, the Spanish debt bond holders."
"While I don't believe for a minute that anything is even closer to begin fixed in Europe and I don't believe this Spanish bailout will be nearly as smooth as initial Sunday opening trade indicates over the next few weeks, the market is about sentiment and headlines and this weekend provided them."
"ES seeing 3C confirm the uptrend all of Friday and a 22 point opening move Sunday night above Friday's already impressive move. Although we still have a long night which I'm sure more details on the Spanish bailout will emerge on the European open in a few hours"
"Just remember the market is not going to make this a cake walk, but when in doubt, go to the big picture."
Sure enough, the word "Subordination" was what all the hoopla in the market was about today. I won't go in to details as to why the temporary EFSF is not likely to fund a Spanish banking bailout and I won't go in to much detail about the permanent ESM mechanism that probably would be used, even though Germany is yet to ratify the mechanism. I will say that IMF funds which will not play a role in the bailout are not legally senior to other debt, although they are given preferential status. However, the ESM has in its treaty, law that subordinates all other debt, meaning the ESM gets paid back before any other creditors.
This is what has caused a lot of trouble for the not so well thought out Spanish Bank bailout announcement that committed $100 bn euros of money (that isn't actually reality yet as the ESM has not been ratified by Germany) over the course of a 2 and a half hour teleconference. How long did it take Greece to negotiate a bailout again?
As mentioned last night and we saw early today, Spanish sovereign debt was being sold hand over fist as creditors realized they were being subordinated and may indeed face a Greek-like debt restructuring deal; their only protection in such a situation is CDS (Credit Default Swaps), a kind of insurance that pays out if the country (Spain) defaults on their payments to sovereign debt holders because the ESM debt has legal seniority.
The ISDA is the committee that determines whether an actual "Credit Event" has taken place and whether the CDS insurance policy pays out. Today in a Reuters article, the IFR weighed in and the consensus was, the CDS would not be triggered, thus stiffing Spanish Bond holders again for the second time in 24 hours.
ESM loans unlikely to trigger Spain CDS
Just for good measure, the ISDA came to the same conclusion
The market's reaction around that time...
Another brilliant meeting of the EU Finance Ministers, hoping to give the market a Bazooka and instead giving it a wedgie.
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