Spanish interest rates rise when expected to fall

Despite receiving 100 billion Euros for saving its banks, Spain can not have back the confidence of markets. Its bonds continue to mark rising interest rates, along with the bonds of other EU-problematic member - Italy.

Mathematically the decision to take a 100 billion bailout aid is expected to lower the interest rates as it will reduce the general quantity of government bonds on markets. Instead of borrowing from markets, the government receives money from EU funds so the supply of bonds falls. With an unchanged demand, this must press the interest rates down.

But instead we see exactly the opposite. This means that the negative impact from losing another part of confidence with asking an aid, is greater than the positive effect from lowered borrowing from markets.

In fact the confidence is the most valuable asset on all markets. Almost nothing means as much as the confidence. Spain is ruining its confidence not only by taking new loans, but also by rejecting any ideas of serious economic reforms that can make the economy working. And with no working economy, there is no taxes and money to repay the bonds. So it is risky to invest in such bonds.

Additionally the bailout loans will have privileges compared with classic bonds. The aid will be repaid first. So being a second-priority investor does not look very attractive... :)

Dobri
June 12th 2012

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