What’s the Story? Rajoy and FROB

by CC June 11, 2012 8:35 am • Commentary


Luis de Guindos, Spain’s economy minister, said on Saturday that “the government of Spain declares its intention to request European financing” for its banking system. That announcement followed an emergency 2½-hour conference call between eurozone finance ministers. The 17 euro members agreed to channel the credit through Spain’s Fund for Orderly Bank Restructuring (Frob), which would then inject capital into banks struggling with bad property loans.


Investors gave a cautious response to news over the weekend that Madrid had requested up to €100bn in emergency funds from the EU to help bail out its banks.

Yields on Spanish 10-year bonds, which have an inverse relationship with prices, initially fell on the news of the bailout package. But by early afternoon Spanish yields were trading up 18 basis points at 6.42 per cent as caution set in. Spain’s Ibex exchange was up 1.6 per cent while other European stock markets were also trading slightly higher.


Spain faces supervision by international lenders after a bailout for its banks agreed at the weekend, EU and German officials said on Monday, contradicting Prime Minister Mariano Rajoy who had insisted the cash came without such strings.


The USA set the precedent on Senior Debt of the TBTFs. The shareholders of the TARP banks took losses, but bondholders got a free walk. In the case of Fannie and Freddie, all of the creditors, including subordinated note holders, got paid off at a premium.

If the Spanish bank bailout deal ends up subordinating existing bondholders, it will create a whole new wrinkle to worry about. Portfolio managers who hold senior bank bonds of other EU banks will crap in their pants.


China’s General Administration of Customs announced on Sunday that exports had surged 15.3 percent in May from a year earlier, twice as fast as economists had expected and vaulting May past last December as the biggest month ever for Chinese exports. China’s trade surplus has expanded in each of the last three months.

As indebted European economies slip into recession and unemployment inches back up in the United States, Chinese factories are outcompeting rivals in developing countries and the West to claim larger market shares even as global demand is barely rising.