A: The losses in the Spanish banking system existed prior to the announcement of the official loan. Most investors/analysts now estimate public recapitalization needs of close to EUR100bn. The official loan from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF) per se does not make the losses any bigger. Once the losses are acknowledged, the realistic choices are between Spain issuing bank recapitalization bonds or a bank recapitalization bond issued by the EFSF/ESM to the sovereign that subordinates the rest of government creditors (with the recapitalization bonds, Spanish banks can tap eurosystem liquidity). According to our calculations, existing bondholders are better off, all else being equal, with senior EFSF/ESM financial support at the concessional rate that is being suggested (3-4%) than with recapitalization bonds that would otherwise have to be issued.

In the event of ESM financial assistance in the form of ESM loans following a European financial assistance programme existing at the time of the signature of this Treaty, the ESM will enjoy the same seniority as all other loans and obligations of the beneficiary ESM Member, with the exception of the IMF loans.

The cat’s out of the bag now, isn’t it. On the one hand Spain borrows up to €100bn for the bank recapitalisation which everyone knew was coming, but at a lower rate than everyone had priced into Spanish bond yields. Bond yield relief, maybe.

Eurozone authorities have been busy tweaking their bailout programmes this week.

But don’t expect questions over credit rankings in eurozone bailout policies to go away too soon. Some details of the European Stability Mechanism ESM were finalised last weekend, and so far this particular facility ranks decidedly senior to bondholders.