Summary Of the Bailout of Spanish Banks Creditors So Far — Massive Downside Risk Ahead

If the bailout and the lies of the political class came as a surprise to you, please read my two previous posts published back in May.

• 2012-05-14 — More Denial and Madness from Spain: Santander CEO Derides Surge in Spain Defaults and Spain Rules Out Bailout as De Guindos Says Banks Funded
• 2012-05-12 — Madness and Denial in Spain Lingers

Noteworthy news items:

• Spain Seeks EU’s Fourth Bailout With $125 Billion Request
• Live Webcast of the Bailout Announcement
• Eurogroup Statement
• Finland Wants Collateral for Spanish Bank Aid From EFSF
• Ireland wants rescue deal negotiated to match Spain's

My commentary

Spain is pretending that the loan is not a bailout, and not a rescue (who do they think they are fooling?). Moreover, it comes with supposedly no economic or fiscal conditions (that remains to be proven, since it seems like the Nordic countries want collateral, among other things). Finally, the bailout comes with more favorable terms than market terms, BUT there's a big BUT: the bonds are not only public debt, but apparently, they will be senior to the sovereign debt of Spain, meaning that the sovereign holders all of the sudden appear as secondary lenders, and far less secured than they were. This will put a massive pressure on the sovereign debt of Spain and by itself should be considered a credit event for CDS holders (to be confirmed). This should also trigger big credit downgrades of the sovereign bonds. I'm very curious to find out what will happen to the Spanish yields at market open. They should rise dramatically. 

Finally, if you think that this will stop the contagion think again: not only will this reopen the cases of  already bailed-out countries as they will undoubtedly seek to obtain the same terms as Spain, but it will further weaken the ability of the Eurozone countries to borrow as their debt levels rise to lend to the other insolvent ones, and also as those borrowing will see the new bonds to be senior to the sovereign bonds, making the risk of lending and hence the yields go higher.

Related quotes

Spain Seeks EU’s Fourth Bailout With $125 Billion Request

(Bloomberg) May 11, 2012 — Finland will demand collateral for its share of emergency loans to shore up the Spanish banking system should the money come from the euro-region’s temporary bailout fund, Finance Minister Jutta Urpilainen said. 

“It remains undecided whether the bailout will be granted via the temporary facility, in which case Finland will require collateral,” Urpilainen told reporters in Kokkola, Finland, yesterday. The other alternative is to grant the loan through the European Stability Mechanism, the “permanent crisis mechanism, which will provide better security for taxpayers” and won’t result in demands for extra guarantees, Urpilainen said. 

Bailout Key highlights:

• GUINDOS SAYS SPAIN WILL SEEK EUROPEAN BAILOUT FOR ITS BANKS
• GUINDOS SAYS CONSULTANTS' REPORTS TO BE PUBLISHED IN JUNE
• GUINDOS SAYS FROB WILL RECEIVE THE FUNDS     

On the conditionality:

• DE GUINDOS SAYS AID CARRIES NO MACRO-ECONOMIC, FISCAL CONDITION
• GUINDOS SAYS BANKS GETTING AID WILL FACE CONDITIONS
• IMF ONLY HAS ADVISORY, SUPPORT ROLE FOR SPAIN, DE GUINDOS SAYS

And the important stuff:

• GUINDOS SAYS THIS IS NOT A `RESCUE'  
• AID IS A LOAN IN VERY FAVORABLE TERMS, DE GUINDOS SAYS
• GUINDOS SAYS TERMS MORE FAVORABLE THAN MARKET RATES    

And the most important stuff:

• GUINDOS SAYS FROB'S DEBT COUNTS AS PUBLIC DEBT 

Eurogroup statement on Spain

The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect. 

The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request. 

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total. 

Following the formal request, an assessment should be provided by the Commission, in liaison with the ECB, EBA and the IMF, as well as a proposal for the necessary policy conditionality for the financial sector that shall accompany the assistance. 

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The  Spanish government will retain the full responsibility of the financial assistance and will sign the MoU. 

The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector. 

We invite the IMF to support the implementation and monitoring of the financial assistance with regular reporting.

Finland Wants Collateral for Spanish Bank Aid From EFSF

(Bloomberg) May 11, 2012 — Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) in loans to rescue its banking system.

[...] 

Economy Minister Luis De Guindos announced the aid request yesterday after a three-hour conference call with his European counterparts. He said the terms of the rescue loans are “very favorable” compared with market rates.

The funds will be channeled through Spain’s FROB bank rescue fund, and will add to Spain’s debt [...] 

The European aid for Spain’s banking industry will carry an interest rate of about 3 percent, El Pais reported today, citing people familiar with Spain’s negotiations with its European partners whom the newspaper didn’t identify by name.[...] 

The bailout adds to the 386 billion euros ($480 billion) in pledges to Greece, Ireland and Portugal that European governments and the International Monetary Fund have made since 2010.

So we're now at about 486 billions euros into the ditch, and that's only the beginning for Spain.

[...] The Spanish government’s credibility was jolted by the funding hole reported last month by Bankia Group, the third- biggest Spanish lender. The bank’s new managers went beyond the government’s provisioning rules and asked for a 19 billion-euro bailout. De Guindos had said two weeks earlier that 15 billion euros would be enough to meet the requirements of the second of two banking decrees he has drafted this year. 

“The Spanish problem was entirely avoidable,” said Thomas Mayer, an economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got into trouble and they had to inject another 19 billion, the market thought, well, they don’t know what they are doing.”

[...] Finland will also demand collateral for their share of the loans if the funds come from the temporary European Financial Stability Facility, Finance Minister Jutta Urpilainen told reporters yesterday. Ministers haven’t decided whether that fund or its permanent successor, the European Stability Mechanism, will be used, Urpilainen and de Guindos said. Should the ESM provide the funds, the loans would be senior to outstanding government debt, giving Spain’s EU lenders protection at the expense of bondholders. 

“Market reaction is unlikely to be favorable given that the bailout places even more strain on Spain’s creditworthiness, sets a precedent that the euro zone’s other bailed-out countries, in particular Ireland, are likely to object to, and risks putting pressure on Italy,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in a note.

The highlighted sentences are of critical importance: basically, it will put a massive pressure on the sovereign debt of Spain. I'm very curious to find out what will happen to the Spanish yields at market open. They should rise dramatically. What kind of "bailout" would that be?

Rajoy, who said as recently as May 28 there would be no bailout for the nation’s lenders [...]

Well, Rajoy is a big fat liar as are ALL POLITICIANS. Is that news?

Ireland wants rescue deal negotiated to match Spain's

AFP - Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday.
"Ireland raised two issues: one is the need to ensure parity of the deal with Spain retroactively on its bailout from EFSF," one European government source told AFP, referring to the temporary rescue fund, the European Financial Stability Facility.
Another European government source confirmed the information.