Tuesday, 12 June 2012

Spanish bailout, Señor

The Spanish banks are getting a European bailout of €100bn. Whoopee! Bonuses all round, fiesta time in Madrid. (It is not actually enough but the kick has sent the can miles down the road so let us not worry about mañana until mañana actually comes.)

Even better, the IMF is not involved so no British taxpayers will be harmed in the making of this bailout. But there is a sting in the tail though. Let us have a leetul look at the bailout mechanism.

First German taxpayers give billions of the euros to the European Stability Mechanism (ESM). Then the ESM lends the money to the Spanish government; then the Spanish government passes it on to the Spanish banks who say muchas gracias amigo.

And where does the liability lie? It remains with the Spanish government. Yes, if the banks default the Spaniard in the street must pick up the tab. Carlos and Carlota have had a marker thrust upon them for private banks that were nothing to do with them. And worse, borrowings from the ESM count as "senior" debt. That means if the Spanish government defaults then the vulture pecking order is: Germans first, bond holders second.

Not surprisingly the market in Spanish government bonds has spooked and yields are up 50 basis points today. Bond-holders have just realised they have been pushed down the totem pole.

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