When the transfer takes place to the European Stability Mechanism the new loans will not be given seniority, giving extra security to Spain’s creditors.
That seems to be the crux of the matter.
The new bonds do not subordinate the old, they rank pari passu. That means the ESM is on the hook for them.
What\’s going to be interesting therefore is the rate at which the ESM can borrow in the markets. For, at least I think I\’m right here, the ESM is being funded by jointly guaranteed bonds. Not by the ECB printing money, but by borrowing.
At which point, the greatly interesting thing becomes: at what rate can the ESM borrow?
Not to mention the question of who will lend to it at any rate?
Funding commitments for the ESM:
Spain 12%
Italy 18%
France 20%
Greece 3%
Portugal 2.5%
Belgium 3.5%
It doesn’t look like the most solid credit out there.
And yes, Spainish and Italian governments are contributing 12% and 18% respectively of the fund which is being used to bailout Spainish and Italian Governments.
In what way does this make anything better ?
The ESM will have government funding of up to €700 bn at some point in the future. It will borrow more and may lend €500 billion of the base capitalisation, so for the first €200 billion of borrowings the price should be pretty good because it is backed by cash. After that it looks decidedly dodgy.