The Financial Times has excellent columnists, but the newspaper also receives – or at least selects! – useful and informative letters from readers. In today’s paper, two letters caught my attention.
The first letter is from Mr Joseph Ghalbouni. He explains that the loan of 100 billion euros that eurozone finance ministers recently offered Spain is worse than useless. Why? Because of a condition attached, namely that the loan is senior to all other obligations of the Spanish government. If the finance ministers wanted to help, writes Mr Ghalbouni, they would have offered a loan with junior status, so that other creditors would be paid first in the event of default.
In other words, if you originally owned Spanish government senior debt, after the “rescue” you own junior debt. Having seen what happened to the Greek government senior debt after it was turned into junior debt and then defaulted upon, it is no wonder that the spreads on Spanish government debt went up after the “rescue”.
If the European loan to the Spanish government was junior to the rest of the Spanish debt, all the other bondholders would feel they were better off after the rescue and spreads would drop. Moreover, if the European countries did not expect the Spanish government to default, the junior status of the debt would not matter.
Joseph Ghalbouni, “Junior debt would demonstrate more confidence in Spain“, letter to the editor, Financial Times, 18 June 2012.
The second letter complements that of Mr Ghalbouni, but is much shorter, and lighter in tone. It made me smile.
[T]he Spanish foreign minister linked the eurozone to the Titanic and warned the wealthy Germans that “if the Titanic sinks, it takes the passengers with it, including those in first class”. I read a few weeks ago that when the Titanic sank, 90 per cent of the first class passengers were saved and 90 per cent of the third class passengers died. I guess José Manuel García-Margallo did not know that when he made his remark.
Volker Hase, “Fatal – for those in third class“, letter to the editor, Financial Times, 18 June 2012.