Tuesday 20 March 2018


Q: LAST night's 4-0 score shows Spanish and Irish soccer are worlds apart but I hear our bond yields have a lot in common these days.

A: Spain is paying almost the same as the theoretical cost for Ireland to borrow on the bond markets and this is as scary as trying to mark Andres Iniesta. Spain is the world's 12th biggest economy but seems to be locked into some kind of death spiral. If Spain can go bang, nobody is safe.

Q: But we would still have to pay more to borrow than they do?

A: Just about and don't forget the old market expression "the trend is your friend" usually holds true. The cost of borrowing for us is about 7.2pc but it was 9.2pc not so long ago so it is declining. Spain's cost of borrowing is rising quickly and hit a record 7pc yesterday. It was 5.8pc just a month ago. Things are getting better for us and worse for Spain.

Q: But what happened to the €100bn bailout for Spain's banks announced six days ago. Surely that is doing some good?

A: It is slowly sinking in that a lot more will be needed. The final bill won't be fully known until a detailed audit of the banks is completed by July 31 and then there is another deadline in December. That's a long time for the markets to wait.

Q: But why is this hurting government bonds? Spain's banks are in trouble but those wily Spaniards managed to avoid doing a Brian Cowen and guaranteeing everything in sight so surely Spanish government bonds should be okay?

A: One of the main reasons is the doubt surrounding the nitty-gritty of the bailout. A lot of investors fear the deal will promise to repay Europe's rescue funds first if Spain defaults. This makes Spanish bonds very unattractive. Remember that it is only a few months ago that investors lost their shirts on Greece.

Q: But surely it is not going to come to that? Spain is not Greece and there's no question of a default?

A: Well most people in the markets expect a sharp slowdown in the Spanish economy and now believe that Spain is only a few steps away from needing more external help. A Reuters poll found 35 out of 59 analysts across Europe and the US said it was "likely" or "very likely" Spain would need international help for its state funding within the next 12 months.

Q: Is Spain in danger of running out of cash?

A: Well, their treasury minister has said publicly that the bond market is closing to Spain but the country has a good bit of cash saved up which means it can pay the bills for another few months and the Government could boost revenues by raising VAT or energy taxes.

Q: What are their taxes like?

A: VAT is one of the lowest in Europe and energy taxes are pretty low as well -- that's why it is such a cheap place for a holiday. This means there are some easy options for quickly raising cash but the government is resisting.

Q: I've just been googling Spain's national debt on my fancy new smartphone and it doesn't look too bad to me. The Government is predicting debts equalling 79.8pc of gross domestic product at the end of 2012 which is less than Germany's debts. What's the big deal?

A: Beware of comparisons. Spain's national debt (and indeed Germany's) excludes debts chalked up by regions and all sorts of other organisations. The real situation is worse but nobody really knows how much worse. Some economists are saying Spain may end up needing as much as €700bn which would stretch Europe's rescue funds to breaking point.

Q: Won't the Spaniards just have to do austerity like the rest of us?

A: They've been doing it for years and it is not clear how much appetite there is for further cuts. The country is in its second recession in three years, one in four Spaniards are unemployed and business bankruptcies are rising.

Q: Sounds like a home from home.

A: It's beginning to look like it. The worry for the rest of the world is that their home is 10 times bigger than our home.

In fact, Spain's economy is more than twice the size of Ireland, Portugal and Greece put together.

It's a case of the bigger they come, the harder they fall.

Irish Independent

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