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Saturday June 09, 2012 20:17 by Paul B. - Workers Solidarity Movement
Spain began this week in bailout territory. Despite the increasingly shrill warnings of imminent catastrophe from Madrid, the battle of wills between the Spanish capital and Brussels, Berlin and Frankfurt has managed to avert the hour of judgement thus far. But can they achieve the aim of preventing the fall of Spain before the second Greek election? [Italiano] Spain: Not waving but drowning - bailoutSpain began this week in bailout territory. Despite the increasingly shrill warnings of imminent catastrophe from Madrid, the battle of wills between the Spanish capital and Brussels, Berlin and Frankfurt has managed to avert the hour of judgement thus far. But can they achieve the aim of preventing the fall of Spain before the second Greek election?
Two days ago the auction of Spanish debt bonds was seen as the likely crunch point coming into the week. Spain started from the position of being past the 450 bps technical limit set by the main European clearing house for the maximum spread between its 10 year bond yields and those of a basket of AAA grade Eurozone 10 years. Being in breach of this limit for over 5 working days was the technical mechanism that brought about the Irish and Portuguese bailouts in the past two years. The simple version is that banks holding national bonds need to pay a charge to the clearing house, which acts as guarantor, to temporarily swap the bonds for a cash equivalent. This charge is called the “margin call” and has to be vested with the clearer. If the clearer raises the margin call from the basic 5% to 15%, then all banks with these instruments loaned out for cash, suddenly need to find the extra cash to pay the increased margin. If all their money is in national bonds, then they have to sell some at any price to pay the margin call. The bond prices go down, the ratings agencies lower their ratings, the clearing house increases the margin again, creating the “death spiral” that forced Ireland and Portugal into the Troika bailout - not because the state was bust at the time, but because their banks were days away from cash flow collapse. |
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