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Spain: Bondholders fret over seniority

June 11, 2012: 3:22 PM ET

Spain is well on the way to securing up to 100 billion euros from the European Union to bailout its banks. But yields on Spanish bonds are going up. What gives?

Germany. That's what.

Germany wants the money for Spain's bank bailout to come from the European Stability Mechanism, as opposed to the European Financial Stability Facility, according to an official in the German finance ministry.

"If you want to use the more efficient option, then the ESM would be the preference," the official reportedly said during a press conference.

Using money from one bailout fund or another may seem like a minor detail. But investors in the bond market see it as a potential deal breaker.

That's because the ESM would be a senior creditor, while private sector bondholders would come second in any bailout of the Spanish government. In other words, investors might not get all of their money back.

"It's never a good sign when investors want to scour contracts for legal considerations in judging payback potential," said Ciaran Ohagan, an interest rate strategist at Societe General, in a note to clients.

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Ben Rooney
Ben Rooney
Staff writer, CNNMoney

Ben Rooney is a staff writer for CNNMoney. He covers the European debt crisis and other international finance stories, in addition to writing about stocks, bonds, investing and other Wall Street-related news. Follow Ben on Twitter: @ben_rooney

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