Thursday, June 14, 2012

The 7% solution

This morning, yields on 10 year Spanish government bonds hit 7%. That is a Euro-era record for Spain and a clear sign that the bank "bailout", which basically created billions of Euros more of senior debt to be repaid, didn't work and Spain is again on the ropes. The Spain - Germany spread is almost 550 basis points!

Either Germany and its Northern Neighbors are going to have to cough up a ton of cash (not loans) or the ECB is going to have to seriously print Euros, or the whole enterprise is doomed.


Woj said...

The senior status of the new debt actually depends on whether the EFSF or ESM is used to provide the loan. Since the ESM has yet to be ratified, the EFSF is the quicker mechanism and would actually not be senior to current debt. Spain would also be removed as a contributor to the EFSF and would therefore end up adding less public debt than the 100 billion loan.

The trouble for Germany and co is that the extra burden falls entirely on them and without senior status.

Fundman said...

Take a look at the Euro/USD rate. Euro is rallying. Everyone seems to think Merkel will cut a deal to either further integrate Europe or bring out a "bazooka". I bet they'll try to print their way out first.