The most important paragraph of unreadable legalese in Europe today

Another problem for the Spanish bailout

The most important paragraph of unreadable legalese in Europe today is this (via Dealbreaker):

"Subordination" means, with respect to an obligation (the "Subordinated Obligation") and another obligation of the Reference Entity to which such obligation is being compared (the "Senior Obligation"), a contractual, trust or similar arrangement providing that (i) upon the liquidation, dissolution, reorganization or winding up of the Reference Entity, claims of the holders of the Senior Obligation will be satisfied prior to the claims of the holders of the Subordinated Obligation or (ii) the holders of the Subordinated Obligation will not be entitled to receive or retain payments in respect of their claims against the Reference Entity at any time that the Reference Entity is in payment arrears or is otherwise in default under the Senior Obligation. … For purposes of determining whether Subordination exists or whether an obligation is Subordinated with respect to another obligation to which it is being compared, the existence of preferred creditors arising by operation of law or of collateral, credit support or other credit enhancement arrangements shall not be taken into account, except that, notwithstanding the foregoing, priorities arising by operation of law shall be taken into account where the Reference Entity is a Sovereign.

What does it mean?

The passage contains, somewhere within it, the answer to whether Spain's bailout constitutes a "credit event"; in other words, whether all the people who had bought insurance against Spain defaulting get paid off or not.

The problem is that the money for the Spanish bailout is coming from the European stability mechanism and the European financial stability fund (the ESM and EFSF), both of which insist on being "preferred creditors". We touched on this yesterday, but being a preferred creditor means that these loans must be paid off, in full, before any other debt can be paid down.

To the holders of the other debt, that means that at a stroke, they became less likely to be paid back. The debt they now hold is "subordinated" to the European debt. Those who purchased insurance (in the form of CDSs, or "credit default swaps") against that outcome would quite like to be compensated for it, and so the investigation into whether it constitutes a credit event begins.

But there's a wrinkle in the wrinkle. While both the ESM and EFSF are preferred creditors, only the former is legally enshrined as one. In practice, they both get repaid before anything else, but the credit event is concerned with legality rather that practicality (as with so much in finance). Hence the long discussion above as to the exact nature of subordination.

Reuters got a financial lawyer to look at the problem, and the basic conclusion is that, while the debt is subordinated, it's not "subordinated". For the purposes of paying out to CDS holders, the key question is whether or not Spain is entitled to pay off its subordinated bonds while it is in default with its European debt. The answer to that lies in Spanish law, not European, so unless Spain passes a law to that effect, CDS holders don't get a payout.

Even if the subordination doesn't trigger a credit event, it's still hugely problematic for Spain. It's what triggered the spike in the cost of Spanish debt, with yields currently up almost half a percentage point from Friday. The issue that the country is now having to battle with is that nobody wants to lend to a country with preferred creditors, because they may not get their money back. No wonder it's been called a failout.

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Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Grant Shapps on the campaign trail. Photo: Getty
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Grant Shapps resigns over Tory youth wing bullying scandal

The minister, formerly party chairman, has resigned over allegations of bullying and blackmail made against a Tory activist. 

Grant Shapps, who was a key figure in the Tory general election campaign, has resigned following allegations about a bullying scandal among Conservative activists.

Shapps was formerly party chairman, but was demoted to international development minister after May. His formal statement is expected shortly.

The resignation follows lurid claims about bullying and blackmail among Tory activists. One, Mark Clarke, has been accused of putting pressure on a fellow activist who complained about his behaviour to withdraw the allegation. The complainant, Elliot Johnson, later killed himself.

The junior Treasury minister Robert Halfon also revealed that he had an affair with a young activist after being warned that Clarke planned to blackmail him over the relationship. Former Tory chair Sayeedi Warsi says that she was targeted by Clarke on Twitter, where he tried to portray her as an anti-semite. 

Shapps appointed Mark Clarke to run RoadTrip 2015, where young Tory activists toured key marginals on a bus before the general election. 

Today, the Guardian published an emotional interview with the parents of 21-year-old Elliot Johnson, the activist who killed himself, in which they called for Shapps to consider his position. Ray Johnson also spoke to BBC's Newsnight:


The Johnson family claimed that Shapps and co-chair Andrew Feldman had failed to act on complaints made against Clarke. Feldman says he did not hear of the bullying claims until August. 

Asked about the case at a conference in Malta, David Cameron pointedly refused to offer Shapps his full backing, saying a statement would be released. “I think it is important that on the tragic case that took place that the coroner’s inquiry is allowed to proceed properly," he added. “I feel deeply for his parents, It is an appalling loss to suffer and that is why it is so important there is a proper coroner’s inquiry. In terms of what the Conservative party should do, there should be and there is a proper inquiry that asks all the questions as people come forward. That will take place. It is a tragic loss of a talented young life and it is not something any parent should go through and I feel for them deeply.” 

Mark Clarke denies any wrongdoing.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.