Pick The Subordinated Bond Out
Something interesting happened on the way to the detail-free bailout of Spain's insolvent banking system (which may or may not see senior bond impairments depending on just how big of a capitalization hole the ECB, not some fringe blog, sees). We got details. To wit, from Dow Jones:
The European Union loan to Spain will have a 30-year maturity, an interest rate of 2.5% and a 10-year grace period, reports ABC in its Monday Internet edition, without citing any sources.
The EU has offered to lend up to EUR100 billion to Spain, but the definite figure and the final details of the EU aid won't be known until July 20, when a final bailout agreement is expected to be signed off by EU finance ministers.
Now here's the thing: anyone who has ever looked at a balance sheet, and actually happens to be familiar with terms such as priority, seniority, guarantee, and subordination, will notice something rather peculiar. Namely that only idiots of the nth degree will claim that a 30 year 2.5% bond is pari passu, or equal in right of subordination - precisely what those unelected technocrats in Europe have been repeating day after day since various European summits - with a 10 year at 7%, which is where the Spanish debt actually clears the market. In other words, sorry - there is something here which gives the bailout debt implied seniority. And here is the punchline: if the Spanish bailout debt does not trade like a pari passu piece of debt, it means that it is... i) not pari passu, and that it is ii) priming, no matter what any so-called pundit with a newsletter to peddle, may claim otherwise. Period. End of Story.
Or in other words: spot the subordinated bond out:
- 10 Year at 7%, or
- 30 Year at 2.5%
Take your time. We have all the time that's left in the future of the Eurozone... and then some.
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