Thursday, November 17, 2011

Things just got worse

In October, Spanish ten year bonds offered a yield of 5.433%. In today’s auction, they managed to sell 3.56bn Euros out of a possible target of 4bn Euros but the interest rate payable rose to 6.975% – the highest offered since 1997. That figure demonstrates the markets lack of confidence in the country being able to pay its debts when the bonds mature.

The latest interest rate on Spanish bonds is very close to the 7% level at which other eurozone countries had to seek a bailout an compares unfavourably with similar auctions of bonds in France and Germany.

When Spain joined the Euro, interest rates fell to the much lower levels typical in Germany but while the Spanish government resisted the lure of cheap loans, most ordinary Spaniards did not.

The country experienced a long boom, underpinned by a housing bubble. House prices rose 44% from 2004 to 2008, at the tail end of a housing boom. Since the bubble burst, they have fallen 17%.

During the boom years, Spaniards earned more and spent more. Spanish wages rose to uncompetitive levels – by 36% from 1999 to the end of 2008.  That enabled Spaniards to buy bigger houses, more expensive cars etc. Now that people can no longer afford to  pay their mortgages, it is the banks who are facing the problem of holding housing stock from repossessions and the government who are having to borrow heavily to pay unemployment benefits.

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