zondag 22 juli 2012

Spain is following Greece in its path to bankruptcy

The situation in Spain is looking worse every day. I believe Spain is following the path of Greece into bankruptcy.

Let's take a look at the Spanish bond yields. At the end of 2011 we got the massive ECB bailout package named Long Term Refinancing Operation (LTRO). This relieved the bonds of certain peripheral governments like Italy, Greece and Spain. Lately though, with many Spanish regions on the verge of bankruptcy, Spanish bond yields are rising again. Let's take a quick look at these.

The best way to look at stress in the bond yields is to look at the bond spread between long term maturities (Chart 1) versus short term maturities (Chart 2). If the spread narrows, it means there is stress, because the shorter maturity is about to rise above the longer maturity bond yield. Normally in a healthy economy, longer maturities always have higher yields than shorter maturities. If this is not the case, this means that defaults are looming (see Greece bond yields: shorter maturities have higher yields than longer maturities).

To read the analysis go HERE.

Chart 1: Spanish 10 year bonds
Chart 2: Spanish 2 year bonds

1 opmerking:

  1. The Spanish government can't request a second bailout, as its austerity programme would be shown to be a politically ineffective. Before that happens, the ECB would be foreced into open market operations with another LTRO package, even if the Germans object. A second LTRO package will be needed to counter deflation in order to stablise the money supply in the short term. In the long term, Spain is following Greece in its path to a debt restructuring to avoid bankrupcy.