At the summit of the Group of 20 leading economies in Los Cabos, Mexico, Mr.
Rajoy told his counterparts that it was necessary to "break the link between
risk in the banking sector and the sovereign risk," a Spanish official said.
Officials in Brussels cautioned the momentum hasn't moved in favor of making
such far-reaching changes to the Spanish bank-aid plan. But they said at least
one issue is back on the table: putting bank rescue loans on equal footing with
government bonds held by private investors. Germany has insisted that official
loans should have a preferred status, meaning they shouldn't suffer losses even
if private bondholders are forced into a restructuring.
Some analysts have blamed this prospective subordination of private creditors
as contributing to the retreat of Spanish bond markets since the bank-bailout
plan was announced 10 days ago. Others argue investors should assume official
lenders will have preferred status anyway....putting the ESM on equal footing with regular bondholders would only resolve
part of the problem—assuming that investors would actually believe a statement
to that effect by euro-zone leaders, said Guntram B. Wolff, deputy director of
Brussels-based think tank Bruegel.
The much bigger issue remains the country's growing debt load, he added, for
which no institution has offered a credible solution so far. Spain's demand for
direct capital injections for its banks rather than lending the money first to
the government is being supported by the European Commission, the EU's
executive, and some other EU governments, but is still being resisted vehemently
by Germany, officials said. One EU official, however, said that "it is still
early days" and that the exact structure of the aid hadn't been decided yet.
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