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What’s happening in Spain?

I have come across a number of Spanish-language links that I believe collectively add good colour to our understanding about the current economic and political situation in Spain. I am going to use them as a jumping off point for this quick post on what’s happening in Spain as opposed to burying them in the daily links.

Let me start out here by turning your attention to Lithuania, which has just issued 400 million euros of five-year paper at a yield of a measly 2.63 percent. That means you get just above the inflation rate as compensation for default and inflation risk for a full five years. Lithuania has promised to apply for euro membership as it now meets the fiscal and macro criteria.

To me, this is the major story of the day in Europe. The so-called dearth of safe risk-free assets in the euro zone amidst an environment of low-interest rates and financial repression means that people are willing to give Lithuanian bonds a chance to earn an extra yield pickup. As I wrote last week, this benefits government bond issuers with sovereign currencies the most. Nonetheless, euro zone government bonds are quasi-sovereign due to the now explicit backstop that the ECB’s outright monetary transactions program would represent. And so, even without having to buy a single bond, yields in the euro zone are declining. We should see this as testament to why the ability to print money is of foremost importance to a government’s solvency.

Spain, of course, has received quite a lift from this as well despite the poor macro fundamentals. I believe investors will re-examine Spain in a more dubious light as these fundamentals become more important than the OMT backstop. And I believe this will eventually lead to Spain’s yields rising and Spain’s tapping the OMT program sometime in 2013. Nothing says this is an outcome that is axiomatic given how self-reinforcing lower bond yields can be on public finances. But these articles give the background to why I see a bailout.

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.