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.