The trio repeated their demands three times with mounting tension. Each time she answered no, first in English, and then in German for precision, according to details obtained by Italy\’s La Repubblica.
\”Germany does not want the fund to spend billions in exchange for collateral from ruined banks. I don\’t see why we should end up holding bits of bankrupt lenders,\” she reportedly told them.
All three warned that if Spain is forced to request a sovereign rescue – as Germany demands – it will be deemed insolvent by markets.
Given that it would be insolvent this would seem fair and logical.
Then there\’s this:
A key reason is the cancerous precedent of the Greek haircut deal, in which private investors were left with all the losses. Once the ESM starts lending to Spain, others creditors are instantly pushed down the ladder or \”subordinated\”.
Losses will be larger if Spain ultimately needs to restructure. Stuart Thomson from Ignis Asset Management says this may well happen. He predicts haircuts of up to 50pc for Spanish bondholders.
Which is a reasonable working definition of the result of insolvency. Whether Spain really is insolvent (I think so but….) or simp[ly illiquid doesn\’t make much difference if the end game is 50% haircuts, does it? People will act as if it is insolvent and thus it will be insolvent.