Spanish bonds at 7.062

[koganbot]

Interest on Spanish ten-year bonds is at 7.062 as of 10:00 AM my time (noon Eastern Daylight Time). People who seem to know a lot more than I do think rates this high are a big deal, and a sign of danger. (High interest rates on bonds mean that the Spanish government has to pay a lot to borrow, right?)

Explanations for the high rates tend to be some or all of the following: (1) Investors think the equivalent of a bank run is possible, the run being on the Spanish government rather than a bank; in any event, they consider the investment a high risk, so they want to get high returns if the risk pays off. (Runs don't have to be rational, or based on fundamental problems of solvency. All they need is for investors to fear that other investors are about to start calling in their debts, and for them to know or fear that no entity is prepared to back up the bank or country that's getting run on.) (2) Indications that the recent deal to bail out Spanish banks doesn't have full EU support. (3) Indications that the Spanish gov't will be forced to guarantee the bailout after all, so that the bailout will add to government debt (officials are busy denying this). (4) The deal, while significant in regard to the European banking structure, was too little too late to help Spain and Italy, which still have no credible path to prosperity as long as they're in the Euro-zone and central Europe refuses to do anything to stimulate the economy (ECB lowering rates as little or less than expected reinforces this feeling). (5) Deal will take too long to implement (almost six months). (6) Deal wasn't enough to overcome sense that ECB and the European government are fundamentally frozen in the headlights. (7) At this point, anything is too late, the missiles are launched, the armies are mobilized, the asteroid is on path to hit, the sky is plummeting, Humpty Dumpty has left the wall. (7) Other stuff I forgot or don't know about.

I don't have a telly, and don't regularly check the PBS or NPR or CNN Websites, so I don't know how much this story is getting play in the Land Of The Free Of Heart And Mind. It probably sounds or reads like same ol' same ol' anyway. The Denver Post Website has nothing about Euro problems on its main page, the New York Times does ("Rising Borrowing Costs Put Pressure on European Finance Ministers"). In any event, short-term welfare of millions (billions?) of people at stake, so worth noticing.

Bloomberg's ongoing updates of SPANISH GOVERNMENT GENERIC BONDS - 10 YR NOTE are here:

http://www.bloomberg.com/quote/GSPG10YR:IND/chart

Comments

[dubdobdee.livejournal.com]

Minor point perhaps, but the phrase "European government" is quite misleading. There are various legislative bodies for the EU -- the parliament, the European Commission and the European Council -- but the parliament, which is the one in which representatives come together to vote for or against European laws, cannot initiate legislation. And the ECB is anyway constitutionally independent: I think significant changes to the bank's remit, strategy, ethos and purpose would have to be redesigned at treaty level. Treaties that make these changes do occur -- the last was the Lisbon treaty, published in 2007 and rolled out in 2009 -- but that gives a sense of how slow they are to enact. And the amount of horse-trading and grand-standing, at national and local level, before the member nations vote to belong or leave, very much dwarfs what we're currently seeing.

I think the Commission deals with the technical details of political structure, types of voting system, constituency boundaries and such, and the Council is the one that thrashes out the content of the treaties. Which sometimes take many many years to get to the publishing stage. It is not designed to be a swift-moving political animal: this is actually one of the reasons that the ECB has independence in the first place.

Which is a long way of saying, the "ECB and European governments" would be a fairer target of blame here, in respect of inaction.

"The markets have gotten a bit ahead of themselves here"

[koganbot]

dubdobdee links me the following, from Edward Hugh ("Neither Grexit, Nor Spexit, It's Fixit or Fexit"):

Really I think the markets have gotten a bit ahead of themselves here in expecting instant action, since European decision making works according to its own timeless laws. To reach my conclusions before I draw them, I think it is plain that Spain's bank recapitalisation will be, kicking and screaming, an all Euro Group affair. That is to say the debt sharing the Finnish Finance Minister so desperately fears will take place, even if we take a while to get there. And Spanish and Italian bonds will be bought, even if we need to take a quick look down into the abyss just one more time first. But these measures alone won't save the Euro, only getting the periphery back to growth can do that, and at the moment the suggestion box seems to be empty on that count. Structural reforms alone will work neither far enough nor fast enough.

Well, if you're choosing to invest or not invest in long-term bonds (rather than looking for a quick killing), isn't that the suggestion box seems empty reason enough to head for the hills? So my (4) and (6) might be in effect, even if (2), (3), and (5) aren't.

[koganbot]

Good point, though "the U.S. government" isn't an altogether unified entity either but I think it is fair to talk generally about the U.S. government, and to talk about "government spending" when a lot of the spending is actually on the state and municipal level, etc. But Europe is a different kettle of fishes.

(Part of the summit deal is to unify the European semi-gov't more, regarding its oversight of banks.)

Re: "The markets have gotten a bit ahead of themselves here"

[dubdobdee.livejournal.com]

Getting the periphery back to growth is not going to happen if the periphery heads for the hills though: they can have suggestions imposed on them (not so far popular, not very surprisingly) or they can generate their own (in the shape of ideas for growth that can be realised -- industries that can plausibly be invested in, for instance). Or they can leave, and will likely languish in the shadow of the smaller but richer, more effective and more productive Eurozone.

(Finnish exit is a different matter, I believe... because it's more about dodging any requirement that it support fellow members. But this only amplifies the problem that Greece, say, would face outside the Eurozone: it would get no Euro-investment, and no likely sympathy or help from the richer nations that just skipped out of the Eurozone; though probably some predatory interest, untrammelled by the lumbering structure of European collectivity.... )

Re: "The markets have gotten a bit ahead of themselves here"

[koganbot]

By "head for the hills" I mean the markets, i.e., investors who consider investing in Spanish or Italian bonds who have reason to head for the hills i.e. stop investing in Spanish or Italian bonds (these investors not necessarily being residents of Spain and Italy). Wasn't talking about leaving the Euro zone.

According to the people I "listen" to (i.e., CL's parrot), leaving the Euro would still be too drastic and destructive for Spain and Italy. The question that Krugman and Hugh et al. are asking is whether the Euro-zone overall is willing to save itself, and, if willing, knows how. (Greece a lost cause, Krugman seems to think.)

Re: "The markets have gotten a bit ahead of themselves here"

[dubdobdee.livejournal.com]

oh, gotcha -- still haven't read the hugh piece myself yet, too sleepy now after working on two ASTONISHINGLY bad pieces all day for a freelance editing gig

Re: "The markets have gotten a bit ahead of themselves here"

[koganbot]

My "as long as they're in the Euro-zone" in (4) might have misled you.

The reason to leave the Euro-zone is so that you can devalue your currency a big hunk rather than massively decrease wages one business at a time, which is probably not possible. But leaving the Euro, for which there's no legal mechanism, would be catastrophic for the banks etc. in the leaving country, so is not worth it if it can be avoided, says my parrot. The counter-argument is that the whole thing is going to explode so you might as well take the bear by the horns, or something. Don't ask me.

Btw, as an editor, do you prefer "Euro-zone," "Euro-Zone," "Eurozone," "Euro zone," or "Euro Zone"? (All of which is still easier than choosing between Lee Soon-kyu, Lee Soon-Kyu, Lee Soonkyu, Lee SoonKyu, Lee Soon Kyu, I Soon-kyu, Yi Soon-kyu, etc. etc.)

Re: "The markets have gotten a bit ahead of themselves here"

[koganbot]

Oh yeah, and "euro zone" too. I forgot that the denomination "euro" isn't capitalized (at least Wikip doesn't capitalize it).

Re: "The markets have gotten a bit ahead of themselves here"

[koganbot]

NY Times seems to go with "euro zone," whereas the Associated Press seems to go with "eurozone." ("Seems" because I haven't done enough of a survey to estimate how consistent they each are.)

"This is less credible than the promise by an alcoholic to give up drinking in five years"

[koganbot]

Ah, here's Wolfgang Münchau ("Eurozone crisis will last for 20 years"), who's even more pessimistic than Paul Krugman is:

The summit made a concrete crisis resolution decision contingent on a future decision, which will be even harder to reach, and thus even more likely to fail.

They agreed that there shall be no common bank recapitalisation until a full banking union is established. And the Bundesbank has reminded us that the latter is not possible without a political union. The logical implication is that we won't solve the problem for 20 years.

Counter to this, one could say that the Germans' giving way on one thing, albeit with conditions, signals that indeed they're starting to give way, and when they're facing Greek-Spanish-Italian default square in the face they'll give way on the conditions, too. Which doesn't mean they won't do so too late, of course.

Re: "The markets have gotten a bit ahead of themselves here"

[dubdobdee.livejournal.com]

Eurozone, I think. In copy where I'm deploying caps, anyway.