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Sunday, June 10, 2012 12:39 PM

Rajoy Proclaims "Victory", Says It's Not a Bailout "It's a Credit Line"; Existing Bondholders Subordinated

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In the too stupid to make up category, Rajoy defends ‘victory’ for EU credibility

Mariano Rajoy, the embattled Spanish prime minister, has defended the eurozone’s €100bn bailout for Spanish banks as a victory for European credibility.

He repeated Spanish assertions that the EU aid was different from the full bailout programmes previously provided to Greece, Ireland and Portugal by the EU and the International Monetary Fund, which involved detailed austerity targets and monitoring.

“There’s no conditionality of any kind. This does not affect the deficit,” Mr Rajoy said, placing the new loan deal in the context of his centre-right government’s efforts to restructure the banking system, cut the budget deficit and reform the labour market since it took power less than six months ago.

Economists and analysts say the EU loan nevertheless amounts to a rescue for Spain because the money will go to the state Fund for Orderly Bank Restructuring and was necessary only because Spain itself could not access the sovereign bond markets at a reasonable price.

An opinion poll published on Sunday in the newspaper El País showed that 78 per cent of Spaniards had “little or no” confidence in Mr Rajoy, whose Popular party won an overwhelming election victory over the Socialists in November.
Victory or Defeat?

If a 100 billion euro bailout is a "victory" then what constitutes defeat?

The answer of course is a restructuring or default.

Once the rest of the European banks sell all their exposure to Spanish debt, a restructuring or default is exactly what will happen, just as with Greece.  

No Strings Attached?

Rajoy says there were "no strings attached". Complete details have yet to emerge but there is one major string already. It's called subordination.

Spanish Bondholders to Rank Behind Official Loans After Bailout

Bloomberg reports Spanish Bondholders to Rank Behind Official Loans After Bailout
Investors holding bonds issued by Spain and its banks will rank behind official creditors in the queue for payment after the nation asked for a bailout of as much as 100 billion euros ($125 billion).

Rajoy said the agreement was “the opening of a credit line,” rather than a bailout such as those received by Greece, Ireland and Portugal, and the conditions of the loan affected the financial industry, the sovereign is ultimately responsible for it.

“The risk is now all Spanish bonds are inferior to the ESM,” Steen Jakobsen, chief economist at Saxo Bank A/S in Hellerup, Denmark, wrote in a note. “Finland already declared that if this loan is coming from EFSF they want collateral.”

“This is state financing, and the risks of an equity injection into the banks will stay with Spain,” said Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc in London. “Spain needs a systematic restructuring of its banking system, which could entail haircuts to subordinated bank debt.

Holders of the subordinated debt of banks that Spain has to rescue will probably have to accept losses, according to Gary Jenkins, director of Swordfish Research Ltd. in Amersham, England.

“Whilst Spanish politicians tried to claim that this was not a bailout it is of course a de-facto bailout of Spain itself,” Jenkins wrote in a note.
Key Statement

"Holders of the subordinated debt will probably have to accept losses". So who wants to hold that debt given what happened to Greece?

It will be interesting to see if there is initial euphoria in the bond markets. Regardless, sooner or later (probably sooner), selling pressure will eventually overtake any initial excitement of this alleged "victory".

Mike "Mish" Shedlock
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