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Well quite

\”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.

5 thoughts on “Well quite”

  1. Who advises these fools ? Politics should be classed as an alternative reality where cause and effect are decoupled.

  2. This is amazingly stupid, unless the aim is to have a situation where no government can borrow money except through one of the alphabet soup bailout funds.

    What was it Orwell said about permanent crises?

  3. In fact Finland wants first dibs either way. Hence the demand for collateral if EFSF is used.

    “Lord, what fools these mortals be!”

  4. If bailouts are all such a great idea as many of the left would have us believe, aren’t there loads of lefties out there willing to stump up for the relevant bonds themselves? In fact, don’t we have this wonderful easy mechanism for all those that believe in the massive indebtedness policies of governments, that thing called the “bond market”?

    If only those bleating about how terrible it is Spain can’t borrow another billion to build another empty airport in the middle of nowhere would put their money where their mouth is! If only those supposedly 80% convinced about climate change would return their own behaviour to the stone age. Then, the remaining 20% of us who don’t give it any credit could carry on regardless without causing the massive financial/climate devastation anyway.

    Oh, sorry, I forgot it was all about telling other people what to do and using other people’s money to do it.

  5. The EU has just called for a banking union (which would be.just a disguised fiscal union).

    This goes to show how the current financial Euro crisis is not a _bug_, but rather a _feature_ .

    The designers and dreamers of the “ever closer union” look forward to such crises, and use them as a ratchet to push the unification process forward.

    This is a deliberately designed political event which was inevitable following the Euros creation. The Euro-enthusiastic politicians do not view themselves as regretful fools, but are instead celebrating, having achieved another milestone along the way.

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