The difference between senior credit risk and subordinated credit risk for Italian and Spanish banks has risen dramatically in the last few days (since we posted the macro 'bail-in' trade [3]) with Spanish banks the hardest hit but all wider. Senior credit for these banks remains in its relatively wide range of the last few weeks but the subordinated credit risk has broken out to the upside (an average over 950bps across the eight names in our index) as the market prices in the endgame of any dilutive 'burden-sharing' endgame as a cram-up of sub (and perhaps even some senior) bank credit. Perhaps spooked a little by comments from de Guindos on 'preferreds' today, it is the Spanish Cajas that are worst with Caja de Ahorros del Mediterraneo +185bps at 1455bps (equivalent) today. In the meantime, the LTRO Stigma (the spread between LTRO-encumbered and non-LTRO banks) has pushed back over 180bps to record wides as the LTRO-driven symbiotic contagion unintended consequence of banking and sovereign stress reinforce one another more and more.
Senior-Sub bank spreads are decompressing rapidly (lower pane)...
[4]
and LTRO-Stigma is back at record wides...
[5]
Chart: Bloomberg