The initial enthusiasm for the news that Spain’s banks will get the bailout that was well telegraphed on Friday has been tempered by the reality that Spain’s sovereign debt is about to rise by up to the equal amount of 100b euros that Spanish banks may need. Nothing is free of course, especially in the short term when you can’t print your own currency. Thus, after immediately falling in a knee-jerk response, the Spanish 10 yr yield is higher on the day. Also impacting Spanish bonds is the possible subordination that owners of it now have relative to the ESM (not up and running yet) if that is the entity where the money comes from. The issue of subordination is less clear if the money comes from the EFSF. The hour glass though has been turned over but each time it’s happened in Europe over the past few yrs there seems to be less and less sand in it. Debt writedown/restructuring is the only true long term answer if the debt can’t be paid back via economic growth. Elsewhere of note, China reported a less than expected gain in CPI, greater than estimated fall in PPI and slower growth than forecasted in retail sales and IP. New loan growth in May did rise almost 100b yuan more than expected.
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