Analysts at JP Morgan released Wednesday an 11-point note with the main questions triggered by the ongoing partial rescue plan to support capital needs of the Spanish banking sector. We are passing them on to you, but we think 8 is particularly interesting as it means Spanish taxpayers are pushed to the front line, and 11 is ironic, as we suspect the Spanish conservative government was unaware it was lending a hand to the Greek lefties.
1 Will Spanish borrowing from the EFSF/ESM be senior to existing sovereign debt? Loans from the ESM will be senior, and loans from the EFSF will be effectively senior.
2 If ESM borrowing is senior to the private sector, will this trigger CDS? No.
3 Why does Finland want Spain to post collateral if loans are granted from the EFSF? Politics, preferred creditor status, and ESM capital.
4 Didn’t Finland also insist that Greece post collateral? What happened then? After objections of other euro zone lenders, the terms of collateralisation were made so restrictive that only Finland chose them. No issues appeared to arise vis-à-vis ne
gative pledge clauses.
5 How will the collateralisation issue be resolved this time? It will likely be sidestepped by having the majority of loans come from the ESM.
6 If Spain had to post collateral, would it create issues with existing debt? Not to a meaningful extent.
7 Is Spain’s credit line more likely to come from the EFSF or ESM? The ESM
8 How will the EFSF/ESM raise the money? They won’t, they will rely on direct injections into Spanish banks via the FROB.
9 What is total lending capacity of the EU/IMF, and how much is required to fund the five peripherals if they need help? We estimate that total official-sector lending capacity is near €950 billion, versus 3-year peripheral funding requirement of nearly €1.050 billion if both Spain and Italy were to lose market access.
10 What impact will potential Spanish downgrades have on margin requirements? Moderate, mainly at ECB repo operations.
11 What are the broader implications of the limited conditionality of the Spanish aid package? Other countries now want to dial back their aid conditionality, and the far-left Syriza party is likely to get a boost in Greece’s upcoming 17 June parliamentary elections.