Friday, November 26, 2010

Bleak Friday

Spanish-German bond spread soars to euro-era high.

"So what,"
says Spain's PM...

"Bring it on!"

While American shoppers were stampeding through store aisles like the bulls of Pamplona in the wee hours this morning, Spanish Prime Minister José Luis Rodríguez Zapatero (above) was trying to hold off the bond bears in Europe. Spain, you see, is the biggest of the Club Med deadbeats. Bond investors, wary of possible default, have driven the yield on Spain's ten-year bond up to 5.2%, or roughly double that of the rock-solid German bund. For holding such a risky asset, they rightly insist on getting paid accordingly.

Then there are the speculators who do not own Spanish bonds, but are selling them anyway, betting on still lower prices. Those notorious shortsellers are no better than wolves in the minds of many. They strike in packs and can do big damage. Zapatero challenged them in an interview earlier today. “I should warn those investors who are short selling Spain," said the Zap Man, "that they are going to be wrong and will go against their own interests.” So there.

History tells us that the bond vigilantes are not so easily intimidated. In fact, Zapatero's taunting is about like the South Koreans telling the North Koreans that they can't hit the broad side of a barn door. (That the North Koreans can we now know, because they just did.) Zapatero needs to understand that there are truckloads of testosterone coursing through the financial markets. You cannot thumb your nose at shortsellers with any expectation that they will slink away quietly into the night.

Greece (last spring) and Ireland (last week) have already applied for bailouts for their failing sovereign debts, and Portugal appears to be next. But Spain is the Big Daddy. Some question whether the European Financial Stability Facility, the the €750 billion rescue fund set up by the European Union and the International Monetary Fund, is even big enough to to save Spain. Right now it is all a confidence game. And the 8% hit to Spain's stock market just in the past week (along with sky-rocketing bond yields) suggests that confidence is waning rapidly.

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