Spain panics after disastrous bond auction

The prime minister warns of 'extreme difficulty' after the country fails to find enough bond buyers.

By Jim J. Jubak Apr 4, 2012 1:26PM
Image: Europe (© Photodisc/SuperStock)Well, that's helpful -- if you were worried that a bad Spanish bond auction might not spook global financial markets.

Spanish Prime Minister Mariano Rajoy said Wednesday morning that Spain is "facing an economic situation of extreme difficulty -- I repeat, of extreme difficulty."

That's just in case anyone missed the disastrous results of Wednesday's Spanish bond auction. Spain managed to sell 2.59 billion euros in bonds. That was just above the minimum target for the auction and well below the hoped-for maximum of 3.5 billion euros.

As bad as the shortfall in demand was, the increase in yields investors required before buying was even worse. The yield on bonds maturing in 2020 rose to 5.338% from 5.156% at the previous auction. The yield on shorter-term bonds maturing in 2015 climbed to 2.89% from 2.44%.

In the secondary market, yields on the Spanish 10-year bond climbed to 5.7%. The yield on this benchmark had fallen to a low of 4.6% in late January on hopes that the eurozone had put the euro debt crisis behind it.

Some of Rajoy's extreme rhetoric is political posturing. He has been trying to whip up political support for his deeply unpopular 2012 budget that would impose an additional 27 billion euros in budget cuts and tax increases on the struggling Spanish economy -- unemployment is already near 24% -- in order to reduce the country's 2012 budget deficit to 5.3% of GDP. The alternative to this budget, Rajoy is arguing, is a Greek-style rescue plan with unknown but certainly terrible consequences.

But part of Rajoy's rhetoric is absolutely justified. The European Central Bank and its critics had both argued that the drop in bond yields for troubled eurozone members Spain and Italy was a temporary result of the 1 trillion euro in loans the central bank extended to European banks in December and February. That offer certainly buttressed bank balance sheets, but it didn't solve the sovereign debt crisis in Italy, Spain, and other eurozone countries. It merely bought time for eurozone leaders to come up with a solution.

And now, the fear is, the time is up and there is still no solution.

The drop in yields, recent data from Spain and Italy show, was almost solely the result of banks in Spain and Italy buying bonds from their own national governments. In essence, they were taking cheap money from the European Central Bank and buying higher yielding government bonds.

But the hope that the massive lending by the European Central Bank would bring foreign investors back into the market for eurozone government paper has been largely disappointed. And with no more money flowing into eurozone banks from European Central Bank loans, European banks don't have the cash to buy more sovereign debt. The result is a disappointing auction like Wednesday's, with low demand and rising yields.

As bad as the news is for Spain, it may actually hurt Italy more. The Italian government faces the biggest financing burden in 2012 among any of the troubled eurozone economies. And right now Italy is only about a quarter of the way through its 450 billion euro financing needs (new money and rolling over maturing debt) for 2012.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, 
see the fund's portfolio here. 

Apr 4, 2012 2:37PM
The United States is not far behind since it refuses to acknowledge let alone address the real economic and financial mess our own country is in.  As soon as no one wants to buy US Treasury Bonds perhaps then we will be faced with our out of control spending.  When you spend far more than you bring in decade after decade something is going to fall apart.
Apr 4, 2012 1:49PM
And very soon the US will be in the same boat. Debt piled deep, deep and deeper. What no free money for Wall Street to make money on. These overpaid dingdongs might have to actually develop some sense of business acumen. Acumen means competence for you Wall Street boys. 
Apr 4, 2012 2:14PM
It's a fact that you can't keep a leaky ship afloat forever with pumps. Sooner or later something goes wrong and down goes the ship. At a certain point in time you just have to decide to fix it properly or scrap it, either one of which is preferable to the chaos and tragedy of a sinking.
Apr 4, 2012 2:39PM
How much longer is the EU going to support those countries that are in financial freefall?  I just hope that the US will not fall into that trap.  This country has enough of its own issues to worry about.  Cheap money will only make the matter worse and for a longer time.  Countries, like people are going to have to live below their means before the healing starts.  Smile
Apr 4, 2012 3:48PM
Socialism is a wonderful system...until you run out of someone else's money...
Apr 4, 2012 2:08PM
Money from debt.  Plain and simple.  Why people don't see that is just them with their heads in the sand.

How is interest paid?   By creating more debt.   What happens when nobody takes out any more loans?   The people have no way to pay their debt.  

Apr 4, 2012 2:55PM


"the European Central Bank would bring foreign investors back into the market for eurozone government paper"


Well well.  Optimism is one thing, blindness is another.  As I have suspected in the past, foreign investors, fed up with that entire side of the globe, are putting their money into Proctor & Gamble, Altria, Ford, John Deere, Exxon, Johnson & Johnson, Disney, McDonalds.


European Central Bank members should work for $1.00 a year salary until Europe is fixed.  Wink



Apr 4, 2012 4:31PM
Capitalism is a great system if you don't borrow your way into oblivion......  Socialism is a great system if your in a position to profit from the hypocrisy and corruption that always exists.... or are willing to live in abject poverty...
Apr 4, 2012 6:36PM
There is no way out. Weakest borrowers are guaranteed to go bankrupt in debt based monetary system. Google  DEFLATIONARY CRASH to understand why. Entire money supply is debt and it needs to be paid with interest. Without further borrowing there won't be enough money to pay the debt. When strong borrowers pull more than their share of the money supply to pay debt, weak borrowers won't be able to earn enough. This is why foreclosures happen, countries and companies go bust at times of deflation. R.I.P. Spain, Italy, Ireland, Portugal, Greece. After those there will still be the next weakest borrower, so we will see how far the dominos will fall.

Apr 4, 2012 5:37PM
I don't get to say this much, but "I told you so!" Don't know why people were getting all optimistic about the ECB loans, since it was only a liquidity fix and not a balance sheet fix, even for the banks, and did nothing for the sovereign debt overhang. There just isn't enough money to do for Spain and Italy what was done for relatively tiny Greece. Expect more of the same, and worse.
Apr 4, 2012 5:29PM

You don't become wealthy by borrowing money.  You don't borrow money by not spending more than you take in.  It really doesn't have to more complicate than that.  If I can't afford to pay for it I don't buy it.  If a country doesn't have the revenue it doesn't provide it.  Someone has to pay for these services and if you borrow to pay for them it cost you more and you push the problem to the next generation to solve plus their own.  Not to respectable

Apr 4, 2012 5:14PM

The pain in Spain seems mainly like Greece again.

Apr 4, 2012 11:33PM
Just another chapter in the fall of the Euro.
We definitely need a change in Washington this November.  Someone that actually likes our country and will put people back to work.   Please Vote for Romney, 2012.
Apr 4, 2012 2:17PM
Apr 5, 2012 10:21AM
By looking at what is happening in Europe is a mirror of what to come in the USA. We're still debating our financing, such as balancing the budget. Our politicians, democrats and republicans, are offering band aid solutions if any. We're under the assumption we could borrow our way to prosperity.
Apr 4, 2012 3:30PM
One should note that the unemployment rate in Spain was worse before the euro,  my memory could be in error  but the same existed for Italy,Grece and others.....the euros was  helpful to whole generation of Europeens and of Americans,  Generations of spanish and italians mens travelled to France,Germany and others for contract seasonal work prior the euros , 35 years old men arrived then to work in the field of France never having had a steady job ,bare-footed, spending their first check on a pair of boots that their feet could not support....we all need to correct the errors of governments and bankers  who mismanaged the after the war expansion in Europe , economists are the last one we should listen to, they are the one least responsive to their errors.....
Apr 5, 2012 3:32AM
These governments need to adopt the inverse of the old British Navy prize system:  If you are a government employee, a rank and filer, and you find a way to save your agency money without sacrificing functionality or efficiency, you get 5% of what you save the agency.  Your bosses get another 5% to divvy up amongst them with the lowest getting larger %ages than the higher ups. The government saves 90% of the reduction in expenditures. 

Why? because right now government agencies are only rewarded for GETTING BIGGER in budgetary terms.  Money = Power = Prestige has been the rule for decades in bureaucracies the world over. Everyone knows there is fat to be cut, so let's start cutting.
Apr 4, 2012 4:11PM
Capitalism is a great system, until you run out of someone else's resources.
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