Comments on: Could Spain’s bank bailout trigger its CDS? http://blogs.reuters.com/felix-salmon/2012/06/11/could-spains-bank-bailout-trigger-its-cds/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: FifthDecade http://blogs.reuters.com/felix-salmon/2012/06/11/could-spains-bank-bailout-trigger-its-cds/comment-page-1/#comment-40044 Tue, 12 Jun 2012 00:32:55 +0000 http://blogs.reuters.com/felix-salmon/?p=14890#comment-40044 The money comes from the EFSF not the ESM, so it isn’t as bad as all that. Unlike the Californian debt crisis of course…

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By: Chris_A http://blogs.reuters.com/felix-salmon/2012/06/11/could-spains-bank-bailout-trigger-its-cds/comment-page-1/#comment-40037 Mon, 11 Jun 2012 21:31:41 +0000 http://blogs.reuters.com/felix-salmon/?p=14890#comment-40037 Isn’t this essentially the same set of arguments that somebody made back in March 2011, claiming that the Irish had layered all their bonds by borrowing from the IMF? Didn’t work. For the curious, it’s credit event 2011031101.

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By: dWj http://blogs.reuters.com/felix-salmon/2012/06/11/could-spains-bank-bailout-trigger-its-cds/comment-page-1/#comment-40036 Mon, 11 Jun 2012 21:16:51 +0000 http://blogs.reuters.com/felix-salmon/?p=14890#comment-40036 “Firstly, this bailout is going to add a good €100 billion or so to Spain’s national debt, over and above its existing bonds. That in and of itself makes Spain less creditworthy: the more debt you have, the lower the chances are that you’re going to be able to pay it all back.”

As a matter of High Theory, if this money produces an ROI in excess of its cost, then it does actually make Spain more creditworthy, even if this is senior debt. As a practical matter, this probably increases the variance on outcomes that could reasonably be expected; in particular, it increases the chances that bondholders will be wiped out entirely at some point.

At least, I think that’s the case. It would be if the debtor weren’t sovereign. Politics is deeply inextricable from how allocations of future income are going to be made, and I’m at a complete loss as to how Spanish politics is likely to play out.

Incidentally, I would think that most good faith holders of CDSes would hope that this doesn’t trigger them yet, because (as you note) they’re not likely to pay much if they do, and the position (short or long) goes away if it triggers. What buyers and sellers are hedging/betting on is not this scenario, but one that won’t transpire until, oh, at least next week, and a premature trigger would drive basis risk all to hell.

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