Photo: Bloomberg TV
The general received wisdom of crowds it that the reason the Spanish bailout is a disaster is that existing sovereign debt is subordinate to the ESM bailout money.Jefferies David Zervos thinks this is nonsense:
Let’s assume the ESM lends to the FSOB to recap Spanish banks. And then let’s assume its 1 year later, after 100b has fronted to the Spanish banks, and there are riots in the streets of Madrid. Shortly thereafter some Chavez/Tsipras like character gets elected in Spain. Further, let’s assume that Spain decides the only path forward is to break with EMU and reinstate the Peseta. Does anyone really think there will be a difference between a Target2 creditor, ESM creditor or Bono creditor? Does anyone really think the Spaniards are going to pay the ESM in Euros and then convert or repudiate the other debts?. Pulllease!!! This is all ridiculous.
Later on in the note, Zervos continues to insist that this bailout is a gamechanger, because it’s an attempt to bail out the banks directly, and not the state.
As he puts it, this is a “MASSIVE” change (he did put it in all-caps in his note).
Also in the camp of folks who think the Spanish bailout does matter and means something is hedge fund manager Mark Dow, who sees Germany as being pot-commited now. It has too much skin in the rest of the Eurozone (with the exception of Greece, perhaps) to let it fail :
The Spailout, as it is being called, is the biggest one-shot resource commitment the EZ has made in this crisis. In fact, the commitment seems somewhat open-ended. And it is the first one explicitly made (SMP purchases are really indirect) to a large EZ member state. Moreover, reading between the lines of the official statements from inside and outside the EZ indicates a fairly high degree of commitment to going further and forging a banking union. There are increased murmurings of fiscal union as well. Greece may be already outside the circle of trust, but all this suggests that the EZ—and Germany—very much wants the rest of the EZ to be indivisible.
I have serious doubts about the feasibility of these ambitions, but this is not germane to the point here. What is germane is this: If Germany is indeed pot committed, and you believe as I do that the other players are not going to fold (i.e. the crisis will continue), then we now know on whom the peripheral countries will default.