Europe Scrambling To Avoid Subordination Threat

Tyler Durden's picture

It just gets more and more mind-numbing by the moment. The latest from Europe, which earlier confirmed that ESM loans would get preferred creditor status:

  • SPANISH BANK RECAPITALIZATION LIKELY TO BE IN EFSF BONDS, SIMILAR TO GREEK RECAPITALIZATION - EU OFFICIAL
  • EUROZONE MONEY FOR SPANISH BANK RECAP COULD COME FROM EFSF TO AVOID THE ESM'S PREFERRED CREDITOR PROBLEM - EU OFFICIAL
  • SPANISH BAILOUT COULD LATER BE TAKEN OVER BY THE ESM, BUT EXTENDED LOANS WOULD NOT BECOME SENIOR TO OTHER DEBT

Nothing like figuring out your hare-brained bailout attempt was a failure from the beginning. Ok: Here are the problems with this band aid:

  1. Unfunded
  2. Temporary, and eventually will be replaced by the ESM. Markets can, luckily, still discount.
  3. Negative pledge issue still exists as Finland made all too clear. Countries will demand extra security interest while under EFSF regime and until ESM priming comes in play.

Finally, all of this, is just semantics. To quote from SocGen earlier: "If the loans are paid by the ESM, the loans given to FROB will be more clearly senior to SPGBs, though we expect de facto seniority in any case."

Ball is in your court Europe.