Subordinated debt

James Mackintosh

The draft structure for Spain’s rescue of its banking system suggests a big chunk of the cost will be borne by private investors, through losses on equity and subordinated debt.

Unfortunately, this will hurt the ailing economy even more, and ultimately only save money for Spain’s eurozone partners. The bad news for banks (and good news for taxpayers and efficient resource allocation) is that it also sets a new standard for future bailouts, over-riding the local political desire to save creditors. Worse news for banks could be to come, as the logical next step is for the eurozone bail-out fund to establish rules demanding losses for senior bondholders in future bank rescues.

Charts after the break showing Spain and what looks like the mispricing of bank CDS. Read more