Daniel Gros, 22 June 2012

Spain, needing a bailout for its banks, was granted a vague promise by EZ leaders for up to €100 billion. The details remain obscure, yet they matter enormously. This column argues that the so-called subordination effect of fresh official lending could put Spain on the slippery road to ruin. It argues that if sovereign bonds must be bought, this should be done in the secondary market which, would be pari passu with private investors and thus avoid the subordination trap.

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