It would appear that for once just talking about a potential solution and throwing larger and larger completely unfounded and intangible numbers around as evidence of a 'grand plan' is not going to work as Spain officially requests its bailout. However, just as we noted last week (and suggested as the next macro trade to watch [4]), the bailout will come with strings attached [5]; and perhaps, just perhaps, that is why Spanish bank subordinated credit spreads are deteriorating so rapidly this morning. Our call for a 'bail-in' type solution [4] that crams sub and some senior debt is not only causing Spanish banks to blow wider but also spreading into the Subordinated debt of Italian banks as traders scramble to protect those 'juicy' yields which now seem a little more worrisome given their position on the capital structure. The more liquid Senior and Subordinated credit indices have decompressed around 6bps this morning to a 177bps spread differential (as Subs trade 15bps wider at 465bps on average) and remains the 'easiest' way to position for a 'bail-in'. We also note that the LTRO Stigma (the spread between LTRO-encumbered and non-encumbered bank spreads) has blown back to near-record wides in the last few days.
Two of the biggest Cajas (seen below) are experiencing dramatic widening in their subordinated CDS (equivalents) this morning...
[6]
and that subordinated CDS bail-in 'concern' is leaking into other major banks also...
[7]
and LTRO Stigma has surged back to near record wides...
[8]
Charts: Bloomberg and CMA