And Now It's Spain

It looks like Spain is going to be getting a bailout for its banks:

Responding to increasingly urgent calls from across Europe and the United States, Spain on Saturday agreed to accept a bailout for its cash-starved banks as European finance ministers offered an aid package of up to $125 billion.

European leaders hope the promise of such a large package, made in an emergency conference call with Spain, will quell rising financial turmoil ahead of elections in Greece that they fear could further shake world markets.

The decision made Spain the fourth and largest European country to agree to accept emergency assistance as part of the continuing debt crisis. The aid offered by countries that use the euro was nearly three times the $46 billion in extra capital the International Monetary Fund said was the minimum that the wobbly Spanish banking sector needed to guard against a deepening of the country’s economic crisis.

On Sunday, Prime Minister Mariano Rajoy tried to deflect criticism for his government’s decision to seek assistance for Spain’s ailing bank. The winners, he said, were “the credibility of the European project, the future of the euro, the solidity of our financial system and the possibility that credit will flow again.”

What is interesting here is that this is a bailout for the banks, and not a bailout for the Spanish government.

What is even more interesting is that it appears that the bank bondholders will be at the back of the queue:

Investors holding bonds issued by Spain and its banks will probably rank behind official creditors in the queue for payment after the nation asked for a bailout of as much as 100 billion euros ($125 billion).

The funds will be channeled through the state-run FROB bank-rescue fund and Spain will “retain the full responsibility of the financial assistance and will sign” the agreement with the other partners, according to the statement issued June 9. The document did not make clear whether the European Stability Mechanism, the region’s permanent support fund, which is likely to start operating in July, or the temporary European Financial Stability Facility, will make the loan.

“This is state financing, and the risks of an equity injection into the banks will stay with Spain,” said Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc in London. “Spain needs a systematic restructuring of its banking system, which could entail haircuts to subordinated bank debt. Official lenders on the other hand are likely to demand seniority.”

Spanish Prime Minister Mariano Rajoy has been forced to abandon his attempt to recapitalize the nation’s banks without outside help as the country’s descent into recession obliged lenders to own up to spiraling losses. While Rajoy said yesterday the agreement was “the opening of a credit line,” rather than a bailout such as those received by Greece, Ireland and Portugal, and the conditions of the loan affected the financial industry, the sovereign is ultimately responsible.

Spain needs to insist on major haircuts for the bond holders.  The banks are insolvent, and like the chicken said, they knew the job was dangerous when they took it.