Thursday, 14 June 2012

Spanish bond yields surge

Spain's ten year bond yield hit 7% today. At levels such as these, the other PIGS got support through European bailouts. Nobody can be surprised by the fact that the 100€ bn of extra debt that Spanish taxpayers will have to carry due to the banking rescue has not calmed markets - more European multilateral debt means less debt capacity for everyone else, like the ordinary Joe Bloe's who lost a shirt or two in Greek bonds. The debt dynamics are now getting seriously interesting, in a very Greek kind of way -- at borrowing costs such as these, the primary surplus needs to rise a lot. Taxes have hit the Laffer point, where raising rates won't give you much more yield, and may damage growth so much that revenue actually falls. True, there is a lot of untaxed income, but getting at it takes a long time and plenty of state-building. So spending cuts are logical, but they will also produce a deeper recession. So with a primary surplus too small, it looks as if the debt service is not sustainable; interest rates rise further. In no time, only the European partners will be able to offer funds, and even they may give up given the size of the package necessary. When the Euro dies, remember June 14, 2012, when the first European country that is too big to bail out saw its interest rates rise to unsustainable levels. Of course I hope I am wrong, but it is hard to be optimistic at this stage...

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