PIIGS Situation

Why The ECB’s Rate Band/Target Is Not The Answer | ZeroHedge.

Historical Data Chart

The chart above shows the yield of the 10 year Spanish bond, and you can apply this analysis to the rest of the PIIGS. This chart also serves as a history of the euro. The bond routinely traded at double digit figures up until the mid-90’s. Then, the euro project was announced in 1995. Market participants realized that the currency risk of holding Spanish debt would cease to exist once the joint currency was introduced in 1999. In response, they bid prices up from about 12% to just over 4% in four years. Note that the traders and investors were too exuberant and there was a reversal to 6%.  The bond resumed its rally  when the euro began circulating and replacing the national currencies in 2002.

Since then, bond yields have risen from a low of just over 3% to 6.4% currently. Compared to the 90’s, Spain is still financing itself at bargain rates. So what’s the problem? Spain and the other Mediterranean countries got used to financing themselves at these low rates. Rather than using lower interest costs to reduce their budget deficits, they spent the extra money. Once you increase government spending, reducing it has all sorts of unintended consequences due to the multiplier effect. To wit, decreasing spending results in lower economic activity which causes lower tax revenues. This is known as the debt trap. The only way out of it is either a default or currency devaluation.

So, whenever you hear talk of this plan or that plan from the Europeans, just keep in mind that simple economics fundamentals dictate the endgame, not politicians or bureaucrats.


One thought on “PIIGS Situation

  1. There is something of a misnomer when you say, “they spent the extra money.” While this is true to some degree, it does not describe the entire truth of the dynamic set into motion with Spain’s entry into the imperialist monetarist system being run out of London and New York. Indeed, this same dynamic can be cited as that responsible for the similar burden dragging down both the U.S. and the U.K.

    Part of the scam involved the physical economy’s shutdown, which condition entry into our present day’s manifestation of an imperialist monetarist system, indeed, encouraged. Thus came creation of government programs whose purpose was to placate those who were being thrown onto the labor market scrap heap as a result of the physical economy’s shutdown. Being that debt taken on to finance these programs could be had for a time at increasingly favorable rates, the tradeoff whereby the labor market engaged in productive employment was being forced to shrink could be sold as but a “temporary” phenomenon. Besides, there was great “wealth” to be made in the “new,” financial economy.

    In addition to satisfy the financing needs of these new (or otherwise expanded) government programs you can be sure a much greater portion of new debt was floated solely for its own sake, this on account of the fact that when rates are falling the act of floating more debt can be rationalized as a no brainer. Of course, never mentioned is the fact that, the pigs at the trough NEEDED these highly rated sovereign securities, this that dynamic hedges to the securitized garbage they were shoveling into the global banking system could be synthesized. And lest we forget, a fat gravy train of fees benefiting the few at the expense of the many was being generated, as well, this of course feeding into the “marvel” of the new financial economy.

    Well, now that this “marvel” has all come crashing down, the bogie of “profligate government spending” is increasingly cited as the root of all evil burdening the economy. This is BUNK! The aim is, and always has been, destruction of sovereign nation states, with the ultimate prize being the constitutional republic of the United States. Such is, and always has been, the manner of conduct of the imperial current which by and large has been operating out of Great Britain over the past few centuries. With every ebb and flow of manufactured swindle we have been increasingly witness to over the past few years, it is as plain as day an imperial enemy is at war with the concept of sovereign nation states more generally, and the United States in particular. And what do we have to show for it? Political parties who do nothing but play into it, and citizens who simply don’t know better. Such is our day’s tragedy, no doubt.

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