“Standard & Poor’s warned Monday that holders of Spain’s bonds could be at risk if the nation ends up needing more money than now expected from a new European bailout fund.
It is unclear whether Spain’s banking rescue loan would come from the European Financial Stability Facility and/or a new bailout fund coming into force in July — the European Stability Mechanism (ESM).
If the money — up to 100 billion euros ($125 billion) — comes from the ESM, then the bailout fund’s credit would take priority for repayment over ordinary investors in any crisis.
Several analysts have warned that this change from the existing rules means that a rescue using the ESM could have the unintended effect of scaring ordinary investors away from Spanish government bonds.
“If the amount borrowed from the ESM were to materially exceed the currently expected 100 million euros, the ESM’s self-declared preferred creditor status could, in our view, constrain Spain’s access to the capital markets and therefore reduce the likelihood of bondholders being paid in full,” Standard & Poor’s warned.”