Rajoy wrapped up his comments saying no bailout has been decided for Bankia, sending the euro near the lowest levels since early Asian trading.
The plan, which was reported in the Spanish press on Sunday, is to bailout the bank by handing them Spanish government bonds. That debt would be used as collateral to borrow funds from the ECB.
No final decision will be taken for 2-3 months but this plan would allow a bailout without direct cash injections. Presumably, it’s an accounting trick that allows the government to value its investment at par value on the bonds rather than the market-enforced discount.
The question is: where will the government get the debt? Issuing fresh debt would defeat the purpose and it’s doubtful they have that much debt on hand; they might be able to tap currency reserves. In any case, the Spanish bond market isn’t impressed, with 10-year yields up 15 bps points and barely holding below the 2012 highs.
