12 juin 2012 par Paul Jorion
The 10 year rate for Spanish debt has just reached a historic high. On the 25th November of last year, the rate had beaten a record when it reached 6.72%. Yesterday early in the morning, when the European markets were in ecstasy about the news of an 100 billion euro aid package for the Spanish banks via the Spanish state, the rate had dropped back down to 6.02%. It has just reached 6.809% (at 16:27 Paris time).
Of course the danger of this type of progression is that an increase in the rate generates a positive feedback loop: the rise reflects the impression that the credit risk is deteriorating (the risk of the debt not being reimbursed and of the non-payment of the interest promised), a deterioration which will lead to capital markets demanding the inclusion of a higher “risk premium” in the rate. But a higher rate will make it more difficult for the state to meet its debt commitments (reimbursing the sums borrowed and paying out the promised interest), which will increase the credit risk for its lenders….. which will in turn lead them to require the inclusion of a higher “risk premium” in the rate, etc..
There is a threshold beyond which this mutually reinforcing effect becomes irreversible. Unfortunately for Spain, it has just entered into these waters