wallstcheatsheet.com / By Eric McWhinnie / June 14 2012
Spain recently became the fourth member of the euro to request a bailout since the beginning of the region’s insolvency crisis. The country stands to receive as much as 100 billion euros ($125 billion) in order to prolong the life of its current banking system. It is debt trying to fix more debt. “The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total,” a Eurogroup statement said. With rescues drafted for Greece, Ireland, Portugal and now Spain, the European Union and the International Monetary Fund have committed nearly half a trillion euros to finance European bailouts.
The Spain bailout is just the latest example of governments and central banks trying to solve an insolvency crisis with more debt. The markets quickly figured this out though, as Spanish and Italian bond yields reached new highs on the year just two days after the announcement. On Tuesday, the yield on Spain’s 10-year benchmark hit 6.8 percent, while Italian yields reached nearly 6.3 percent. “It is quite likely that Spain needs a full bailout in the near future although policy makers will try all possible options to avoid this outcome, including a revival of bond purchases by the ECB as well as another three-year liquidity operation,” said Pavan Wadhwa, global head of interest rate strategy at J.P. Morgan Chase.
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