Details Emerge About Spain's Cramming Down "Bailout" Loan

Tyler Durden's picture

While details are largely missing in the aftermath of yesterday's historic announcement from Spain, the one thing that we did catch inbetween the various conferences and announcements, and probably the most important thing, is that the ESM/EFSF funded bailout loan, whose use of proceeds will go to fund the FROB, not one which will rank pari passu with the FROB, will have "terms better than market" - always a code word for priming and cramdown of other debt classes. Today, we learn that this is precisely the case, and the worst case outcome from Spain's pre-primed sovereign creditors.

El Pais reports: "European aid (through the EFSF or ESM) are actually loans to recapitalize the financial system, which the Treasury. Again, the State comes to the rescue of the bank. Of course, it is soft loans, in much better shape than the market: around 3%, according to sources familiar with the negotiations between Spain and its European partners. Faced with this 3%, Treasury currently pays interest of 6% over the 10-year debt." And there you have it: Bankruptcy 101, lesson on Equitable Subordination, where one always gets a priming DIP at terms much better than other classes of debt, when secured and guaranteed by unencumbered assets. Such as what is happening here, because for one to accept 3% rate compared to 6% for 10 Year Spanish GUCs, there obviously has to be some security incentive. It also means that, as we suggested yesterday, subordination has come to Spain.

El Pais continues:

In return for subsidized rates, Spain will cede sovereignty over its financial system, but also lose tax sovereignty, contrary to what the Government said yesterday.

So yes, there will be conditions in exchange for priming. As anyone with the most rudimentary understanding of waterfall analysis could have suggested.

More Google translated:

The Economy Minister Luis de Guindos, said flatly that the only conditionality for banks will require assistance . "There will be no fiscal or macroeconomic conditions," he said repeatedly in a crowded press conference, reports Amanda Mars. But he amended the flat Eurogroup: along with the praise for the Spanish efforts to address their varied and acute imbalances, the communique finance ministers of the euro area makes it clear otherwise. Europe monitored with an iron fist that Madrid continue on the path of fiscal consolidation, structural reforms and labor market. "We will look closely and regularly review progress in these areas, in parallel with financial assistance," the statement said.

The biggest problem, as Greece learned, is that once the priming begins, and the various sovereign debt classes start becoming subordinated, it doesn't end, until the PSI. At which point the crammed down debt gets impaired and receives 20-some cents on the dollar recoveries... which is roughly when Grey Wolf will say going long Spain it is the "no-brainer trade" of the year.

Keep a close eye on Spanish sovereign bonds at the moment when the bond market understands what just happened, and once the euphoria over the very short-term bailout of insolvent Spanish banks passes. Because a month from today another €100 billion will be required, then another €100, and so on.

At that point even the officially acknowledged Spanish debt/GDP will surpass 100%.

* * *

Finally, for all to whom any of this comes as a surprise, we once again urge rereading the Zero Hedge January 2012 walk thru for the sovereign default generation: "Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World", which includes the discussion on UK-law vs local-law bonds, and why in the case of Spain it will be all the difference.

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veyron's picture

Do the other european countries really wish for these terms?

DormRoom's picture

Germany's supreme court should weigh in.   Although it may not violate Article 123 of the Lisbon Treaty, it comes pretty f8cking close.

Ookspay's picture

Yep, but with 40% of German GDP derived from Euro trading partners, they have no choice. there are no good choices.


Rich Bagg's picture

Shorts have their balls in a vice once again.  Look for new cycle highs this week.  So dang funny.



BlueStreet's picture

The higher it rises the further it will fall.  Sell the morning rip.

Chris Jusset's picture

Says ZH: "a month from today another €100 billion will be required, then another €100, and so on."

This is such a colossal clusterfuck.

AssFire's picture

Spanish Bondholders to rank behind "official loans" after bail out...Holy shit, they just overstepped the fucking that was put to the secure share holders of automotive stocks here and apply it to their own bondholders.. How do they expect to sell another bond??  Really?? The government's sole job is now simply picking the losers?? Safe havens except for PM are turning to shit everywhere.

Harlequin001's picture

ho, ho, ho, ho, ho, just try 'cramming down' my gold bullion, I fucking dare you...

maxmad's picture

Rich Bagg, looks like you got screwed over by them making thee announcement on Saturday when the markets are closed!  By the time the market opens tonight, reality will set in and whatever rally there was will vanish into thin air, (similar to your account at MF Global)!

maxmad's picture

One would think they would be smarter than to make a huge bullish announcement on Saturday while the markets are closed and the Hopium addicts are higher than a kite!  LOL  Every drug addict knows that you can't shoot up on Saturday with the hopes of staying high till Monday morning!  The buzz wears off quickly... Amatuer hour in Spain announcing this while the markets are closed... They cost the bulls 200+ points!!!

The Big Ching-aso's picture



Wait.  I thought Spain had to put up some collateral?  Ok so does bullshit count as collateral these days?

slaughterer's picture

"Amateur hour in Spain announcing this while the markets are closed..."  The announcement time was in the interests of state: Rajoy needed to get to the Spain EM game on time on Sunday to keep watch over the COLLATERAL for this loan.  

Law97's picture

Easy to see that one coming just by lookig at the put-to-call ratio.  Another one of those soooo obvious easy trades that is taken to the slaughter.  Of course this is only a very short-term bounce, but will shake out several billion dollars of weak shorts.

OttoMBMP's picture

Hardly 40% of EXPORTS, my friend. And German GDP is not 100% exports.

And what are exports worth which you effectively give away?

THere are very esay choices.

Nussi34's picture

Better to have 2 days of unpaid vacation per week, than to work 2 days per week for the PIIGS!

Ookspay's picture

Read this link posted by EB1 here at 0hedge, regarding Germany's choices, then junk my comment...

YuropeanImbecille's picture

The shit thing here is that they are taking our pensions and playing with that money. And we pay % tax that goes into the pension pot.


I see now that the only way to stop this evil bullshit is to boycott the German products of all sorts. If the German government does not have money to splash around things should calm down.


The German people are being taken on a ride once again, they have no clue that international bankers (code word for joos) run their fucking country and play geo politics and imperial building with their tax money.


So in the end the Germans will be blaimed for something they did not have a clue was happening and the evil zionist-satanist banksters will move on to another victim and suck it dry on blood (gold).




carbonmutant's picture

Well in the MF global model stuff just vanishes... of course this might be different.

slaughterer's picture

Want to find out what the Greek politicians thought of the Spainish bailout this weekend?

It is as if Tyler wrote the script for the Greek politicians yesterday. 

Ancona's picture

The denial is astounding. These Eurocrats actually think all of this is somehow going to go away  if they just throw a little more money at it. Of course,  having not learned their lesson from the cartoon that is Greece, they will simply keep chasing rainbows.

disabledvet's picture

you mean "they throw more control at it." who's paying the bills once the euro-crats go down this road seems to be what the article is implying. and i agree.

Mountainview's picture

And obviously Ireland will now ask for equal conditions as Spain... and on and on it goes...

bugs_'s picture

if only they could outlaw time

RoadKill's picture

Its not really fair to criticize the ESFS or ESM for this.  All DIP loans are Super Senoir.  No one would provide a junior or mezz loan at 3% this late in the game.

But it is fair to point out that Spain ACCEPTING a DIP loan means it is admitting it is bankrupt and that this entire episode is going to play out just like Greece.

1st they lend money to the banks.  The cramdown means any debt Spain issues in the markets is more risky.  Not only does the country have 10% higher debt/GDP then it had yesterday, but their is now a super senior block that takes 10% of GDP in potential collateral from the common pool avalible to non-super senior creditors.  So Spains interest rate goes decisively above 7%.  It might drop next week, but by end of summer we are probably closer to 10% then 6%.  This will gear up Spain to be "taken off the market" for 2-3 years.  IE all of its future borrowing will be 3% super-senior money from ECB/ESFS.  This money will come with Austerity demands.  Market rates on Spain's non-UK foriegn bonds will start rising towards 20%+.  Then we will start talking PSI after the regions get bailed out.

Now that's all without Greece and Italy thrown into the pool.  Next week Greece is going to be a potentially game changing event.  If Syrza wins BIG (and I mean big enough to create a coalition government) then we get Grexit and Pandamonium.  If SYRZA or ND/PASOK win - but not by enough to form a government then we stay in a holding pattern.  Greece will probably end up with a technocratic government in this case.  If ND/PASOK put togeather a coalition - the riots might make GrExit look fun.

As for Italy - once the Bond Vigilanties force Spain on the full dole - they will go after Italy.  And this time the play book has 100% been proven, and anybody that doesn't jump in with them is an idiot.

Now you've been warned.  Go out there and buy UK and other Foriegn law bonds HANDS OVER FIST.  Short the hell out of Spanish law bonds and buy CDS on them.

We need Tyler to create a post where everyone can post the tickers and details of any issuances they want help junking.

Unbezahlbar's picture

Thnx Roadkill....excellent explanation.

Ghordius's picture

Excellent comments. Some parts don't tie up, IMHO.
Syriza winning and exiting the EUR? Not this year.
And I think Spain will be more tough than that...

francis_sawyer's picture

 "Go out there and buy UK and other Foriegn law bonds HANDS OVER FIST"


Money shot right there... (+1)

CrashisOptimistic's picture

I don't like to rain on your parade because the layout of logistics is pretty good, but you're wrong.

You are ignoring the Great Lesson of 2011.  Governments will do ANYTHING to keep the wheels turning.

If UK law bonds are a threat to the system, the UK will cooperate in repudiating them. 

Simply that.  Don't worship at the altar of the rule of law because in a world where you frame the head of the IMF for rape because he has threatened to allow Ireland to default and you need him removed, there is no such thing.

Ropingdown's picture

If the UK joins in repudiating the terms of UK law bonds the City will suffer and Frankfurt will benefit.  I would be extremely surprised to see the UK sacrifice one of its only two advantages.

CrashisOptimistic's picture

The point is one of survival.  If "the system" requires the UK to repudiate those bonds, then they will, because governments will do ANYTHING to keep the wheels turning.

And if you were in government, so would you.

francis_sawyer's picture

When you're "bought & paid for" you have no other choice (or at least don't imagine that you do)... Just ask the TOTUS...

AssFire's picture

I agree, buying any bonds in Europe is no longer a safe bet...the same undermining will lead to the failures to the US bond market.

unununium's picture

Once depositors have started to take physical possession of their currency, the only tool left is to debase that currency.

AssFire's picture

Excellent point, fiat has become the sacrificial cake to the masses.

LULZBank's picture

Oh the fearmongering!! The world is falling apart, blah blah blah!!

C'mon guys ... everything is fine, what are the lot of you talking about?!

Euro is winning.

Spain's Rajoy hails bank rescue as 'victory for euro'

ThirdWorldDude's picture

Eh, you don't think it would've sounded any better if it said "Spain's Rajoy declares bank rescue is a shameful capitulation", now do you? And it wouldn't do any miracles for Rajoy's popularity neither with his London masters, nor with the Spanish serfs... 

Spin'em till they're sick and then some more.

WhyDoesItHurtWhen iPee's picture

Any guesses as to how soon Spain needs a 2nd loan because the 1st one is only a fraction of whats really needed.  And of course no one will have foreseen it.  Who could have known.

WhyDoesItHurtWhen iPee's picture

Certainly, as Spains banks are being audited, it will not come out that GS has "professionally" prepared their books.

LULZBank's picture

Tsk ... You guys are just drama queen! :)


P.S. 4 down arrows ... lol ... seems like a sarc intolerance sunday!!

Ookspay's picture

LOL, I hear ya, tough crowd for a Sunday. Just wait until Rodent, LTER or MDB get here, things could get really ugly.

Towhog's picture

They have superior knowledge. That which is superior to reality. What a crock! They have no respect for human beings.

agent default's picture

There is a difference between Spain and Greece.  In Spain it was the banks that dragged down the public finances, same with Ireland.  In Greece it was the public sector that went bankrupt and dragged down the private sector.  Greece is the exact opposite of Spain and Ireland.  They will not get the same treatment despite what they think.  If they push it, they will be thrown out.

taraxias's picture

Oh, you mean the EU will throw them out so Greece can devalue and build a functioning economy while the ECB and IMF eat losses along with European banks who own the rest of the Greek loans?

Got it, move along, nothing to see here.

agent default's picture

Greece will get thrown out.  Create a functioning economy?  Sure they will devalue, but then again so did Zimbabwe.  But a functioning economy?  With SYRIZA and the Marxist/Stalinist/Maoist mob it carries with it?  Don't fool yourself here, Greece will go down the path of 50's Cuba more than anything else.

Fredd00's picture

Euro short squeeze bitchez!

JR's picture

Trained by maestro Alan Greenspan, and God’s Goldman helper, Lloyd Blankfein.