Spain and the Western Financial System on the Brink…(Time For A War!)
By: Mario Innecco
Jun 19, 2012
This weekend the world kept a close eye on the Greek parliamentary elections and the big worry, from a EU establishment perspective, was that the a victory by the Coalition of the Radical Left or SYRIZA would result in market turmoil today. SYRIZA, under the leadership of Alexis Tsipras, did not win and the New Democracy party triumphed and as a result Greece is now expected to stay the course as far as the EU bailout plan is concerned. So this should have been great news for the markets right? Europe could now move ahead and sort its sovereign debt crisis out.
That is what we were led to believe but the reality of what happened in Europe today was quite disconcerting as the markets turned their eyes towards the Kingdom of Spain and gave it the thumbs down despite the much hyped €100 billion bailout of its major banks just a week before. Maybe the markets now realise that one can not solve a debt problem by piling on more debt? We at For Sound Money think the markets are quickly losing faith in the Kingdom’s ability to not only pay back its debts but also service its debts.
Today the Spanish 10-year government bond or bono yield settled at a post EMU (European Monetary Union) high of 7.158% or up 28.4 basis point from Friday’s closing of 6.874%. The short end of the yield curve reacted even more negatively as the 2-year yield spiked 45.6 basis points higher to 5.445%! This 2-year yield had dropped from 6.12% at the end of November 2011 to a low of 2.15% in the beginning of March this year. This 400 basis point or 4% drop came as a result of the ECB’s (European Central Bank) Long Term Refinancing Operations or LTRO through which the central bank lent a total of €1.018 trillion to European banks at a very low rate of 1% for three years. The first of these financing operations took place on December 22, 2011 and the second leg of of the LTRO came on the 29th of Febraury when €529.5 billion was borrowed from the ECB. As one will notice the Spanish 2-year yield bottomed just a few day after this second LTRO.