At this point there's just no denying it-the latest Spanish bailout didn't take. To be sure some of it is due to worries that have nothing to do with the deal-the coming elections in Greece this weekend where the anti austerity party Syrzia stands a good chance of winning.
However, as the terms are coming out about the Spain bailout it's clear that may have something to do with it too. In any case that the market is not happy can't be denied. The Dow was down by triple digits after the futures were up by triple digits over night. And even worse and more important Spanish yields soared today.
"Investors fled from Spanish government debt on Monday, an immediate rejection of the country's planned bank bailout by the constituency it most desperately needs to impress: the buyers of its own government bonds."
"The market rout puts Spain and the euro zone in a dire position. The bailout plan—in which Spain agreed to accept up to €100 billion ($125 billion) to recapitalize banks—was hatched to alleviate the concern that Spain itself could be dragged down by the declining fortunes of its lenders."
"But confidence in Spain is deteriorating, not rising. Behind the action is a swirl of concern about Spain, its banks and the mechanics of the bailout."
"The unwinding was remarkable for its speed: The cheers for the Spanish bailout lasted just hours—by the end of the trading day any euphoria had evaporated and was replaced by gloom. That suggests Europe is quickly running out of time to find a bolder fix for the sovereign-debt crisis."
"After a burst of strength Monday morning, Spanish bond yields changed course and began a sharp rise. By afternoon in London, the 10-year yield was at 6.54%, three-tenths of a percentage point higher than Friday's close. Bond yields rise when their prices fall."
"Credit-default swaps on the Spanish government, insurance-like contracts that pay off if Spain defaults, zoomed higher Monday. Spain dragged Italy deeper into trouble, too; the Italian 10-year yielded 6.04%, up more than a quarter of a point."
So the contagion spread to Italy. The terms of the deal are not quite what had been hoped:
"Spain pushed hard to separate itself from its banks—at one point arguing that European aid should be channelled directly to the banks, not through the government."
"But Europe's bailout funds don't permit that, and the funds will lend directly to Spain, which will in turn use the aid to buy stakes in banks."
"That structure has unnerved many market participants. One of the euro zone's two bailout funds, the European Stability Mechanism, is considered a "senior" creditor by European authorities, and it is meant to be paid back first if Spain defaults on its debts."
Bottom line is that if you are an investor today you may have more worries about getting into Spain than you did on Friday.
Actually according to some it's a good thing if the Spanish government takes direct stakes in banks.
"New cash equity in the ailing banks is the only transaction structure that will result in stabilizing Spain’s banks. I doubt that this will happen. I see the “easiest/convenient” solution as #2; more debt."
Thanks to Diary of a Republican Hater reader Nanute for bringing the above link to my attention.
On the other hand there's fear in Spain that what this effectively means is "that the bailout amounts to a capitulation that will rob the country of control of its financial sector."
"Spain must submit to close scrutiny of its financial sector by European institutions and the International Monetary Fund as a condition for any bailout, European officials said Monday, countering Madrid's suggestions that the country could escape the tough oversight other rescue recipients have faced."
"While the timing, amount and other details of a rescue for Spain's beleaguered banking sector remain unclear, European officials stressed that any aid would come with strings attached."