\”The government bond market has quickly recognised that the bail-out is adding to pressure on sovereign risk,” said Dominic Rossi at Fidelity Worldwide Investment.
The problem being that Spain has €780 billion of debt which all ranks equally.
Then add a further 10% or so of GDP in the form of the €100 billion bank bailout. OK, painful but not entirely unmanageable.
But if that comes from the EFSF then various people are going to complain, Finland will want collateral and so on.
So, instead, let\’s get the cash from the ESM, only needs 90% to agree, much easier. Ah, but the ESM does not rank pari passu, it has first dibs.
So our €780 billion of Spanish sdovereign debt, and this would include any future issues as well, has just become €780 billion of junior Spanish sovereign debt. Junior to the ESM.
Having dropped below the 6pc mark, Spanish yields – or implied interest rates – on its 10-year debt later moved back above 6.5pc.
Yup, that\’s what happens to junior debt.
It gets better: the majority (67%?) of that Spanish debt which is falling in price is owned by the Spanish financial system. You know, the one being bailed out? The bailout is thus increasing their capital requirements….meaning more is required in bailout funds which increases the amount of senior debt and thus reduces the price of junior which requires more capital in the bailout which….
In the end, the markets agreed. Spanish bond yields or borrowing costs, on its 10-year debt touched 6.5pc yesterday afternoon – higher than where they were on Friday, before news of the package.