No matter where you start, you get back to the issue of debt writedowns. If you're going to do a meaningful restructuring, you have to involve senior debt. If you do that, however, how are the banks going to fund themselves? If you impair senior debt, then the appeal of holding that debt declines. This happened in Ireland ... they saw outflows.
Will it stop outflows from Spanish banks? Near term, perhaps, but euro zone deposit insurance is not part of the plan. This is not a silver bullet.
Where is the money coming from? Most believe it is coming from the European Stability Mechanism, which is supposed to come into effect in the next few weeks. That is 500 billion euros ($627 billion), now there is already 100 billion committed.
If so, that debt will likely be senior to existing sovereign Spanish debt ... so all Spanish bondholders are now subordinate.
Regardless, not everyone thinks that Armageddon is imminent:
1) Fitch, in a note this morning, said that the 100 billion euros "covers a housing collapse on a par seen in Ireland and is at the extreme end of Fitch Ratings’ stress estimates."
2) Goldman Sachs' commodities team put out a bullish note that began with this thesis: "We continue to expect policymakers will be able to contain the European debt crisis, and the economic recovery in the U.S. and China will continue, supporting world economic growth of 3.3 percent in 2012."
The decline in commodities prices is getting Goldman excited — it is moving to a near-term overweight recommendation.
3) Bank of America Merrill Lynch called the Spanish plan: "A credible and generous backstop."
The trader commentary I received over the weekend, however, was overwhelmingly skeptical:
a) "Each time they tell you this is to prevent contagion we are talking about a different place," one trader said. "It’s like a litany of battle honors ... Greece, Ireland, Portugal, Belgium (Dexia), Spain ... Italy has to be next ... their banks are a mess too."
b) "Ultimately does this help growth? Does it change the overall debt situation? Not at all. In spite of the 60 point move in the minis from the recent lows we are still looking at the SAME picture with another 100 billion euros of debt that no one can afford."
c) "Why would you buy Spanish paper if it’s a loan to a strained country that couldn't come up with this on its own?"
d) "It will be interesting to see how the bailout funds are allocated, and if larger banks such as Santander and BBVA are involved. One of the first signs last summer that the crisis was reaching an advanced stage and that the pressure on the Spanish sovereign was impacting the banks was when Santander was unable to float a covered bond issue." (Banco Popular said they would not request EU aid funds).
5) "This is like putting a Band-Aid on a tumor."
1) A big global equities’ rally over Spain’s bailout fades. Overnight, stocks in Asia and Europe rose the most in a handful of months as traders bet that Spain’s bailout deal can ease the euro zone debt crisis, but much of that rally has faded toward the U.S. open.
2) Maybe there is such a thing as shovel-ready: China's bank lending expanded in May. Some economists cited the government's fast-tracking of infrastructure projects.
3) HMO stocks are among the worst decliners pre-market after health insurer Centene said it will record a loss in the second quarter and slashed its 2012 earnings outlook, partly due to higher costs. Centene's downbeat forecast follows a withdrawal of full-year guidance by Molina Healthcare last week. Molina also cited high medical costs. Pre-market, Centene tumbles 28 percent; Molina falls 2.9 percent; and WellCare Health Plans, Coventry Health Care, and Amerigroup slide 1 percent to 3 percent.