Details are still scarce on the proposed bailout of the Spanish banking system. The thinking now is to have a "cashless" transaction in which the EFSF (and/or ESM) issues some bonds, but instead of selling them into the market, it delivers these bonds to Spain's bank rescue vehicle called FROB. FROB will then swap the EFSF bonds for equity of banks that need to be recapitalized. This avoids EFSF having to issue bonds in the capital markets and getting embarrassed if the market is not too receptive (as happened before).
Ideally FROB should also have the ability to haircut banks' unsecured debt or force a debt for equity swap if those banks become undercapitalized again. It's not clear if such provisions will be put in place, though some in the Eurozone have suggested it. Some (Finland for example) are also demanding the "bad bank" type split, similar to Ireland, but so far Spain is not going for it.
|Source: BNP Paribas|
FROB would supposedly pay EFSF back in 15 years (@3% rate). That's assuming FROB recovers the funds to pay EFSF back. If there are losses on this capital injection, the first say 10-15% would be absorbed by FROB (thus the Spanish government), but above that level losses would be shared with EFSF/ESM.
This needs to be finalized soon. The longer the uncertainty about this structure lingers, the more jittery the markets (and the rating agencies) will become.