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As you can see, Spain’s 3 yr CDS spreads are the highest they have ever been. They are significantly higher than they were during the entire Lehman fiasco, and they are even higher (or at least comparable) than they were right before the EU/IMF trillion dollar bailout package was announced in conjunction with threatening those who dared to speculate against Spain’s fiscal health!
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As for the EU denying a bailout package, well we at the BoomBust have shown where their credibility stands...
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As an addendum to the subscription download that picks apart Spain's public finances (
Spain public finances projections_033010)
, I have created a multiple scenario Spain restructuring analysis consisting of a combination of haircuts and restructurings in order to give a picture of potential losses to bond investors and potential gains to Spain. The methodology goes as follows:
| All figures in billion euros | |||||||
| No haircut on principal amount | Involving haircut on principal amount | ||||||
| No restructuring | Restructuring 1 | Restructuring 2 | Restructuring 3 | Restructuring 4 | Restructuring 5 | Restructuring 6 | |
| Explanation | No extension of maturities and no reduction in coupons | Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same | Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50% | Rolling up all of Spain's bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds | Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same | Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50% | Rolling up all of Spain's bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds |
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Looking at the funding requirements Spain will have in the near future, even with the IMG/EU bailout, it looks as if there may be a restructuring in Spain’s future.
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Let it be known that our calculations show that while the Spain to Spanish bondholders will hurt alot, it is not as severe in many scenarios as it is for Greece. The catch is that there is so much more pain to go around due to the amount of Spanish debt outstanding as compared to that of Greece. This does not seem to have the possibility of ending pretty. Remember the damage done to the highly levered banks with just a slight devaluation of Greek debt in How Greece Killed Its Banks:
The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)…
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The same hypothetical leveraged positions expressed as a percentage gain or loss…
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When I first started writing this post this morning, the only other bond markets getting hit were Portugal’s. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:
- Leveraged European Entities from a Sovereign Risk Perspective – retail
- Leveraged European Entities from a Sovereign Risk Perspective – professional
Professional subscribers (click here to subscribe or upgrade) should reference "The Spain Sovereign Debt Haircut Analysis for Professional Subscribers".
