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Euro Bank Run: Spanish Bond Yields Soar

(image: Elena Schweitzer/shutterstock.com)

We’re seeing a kind of bank run happening in Europe. The bond markets recognize that the European Central Bank is unwilling to save sovereign countries that cannot create their own money. So they’re just moving away from one country to the next, causing the cost of bond yields to rise to unsustainable levels. First it was Greece and Ireland and Portugal. Then it was Italy. Now it’s Spain:

Spain paid the highest rate to sell its 10-year debt since 1997 Thursday, just shy of the 7 percent mark seen as unsustainable, as the country is swept deeper into the euro zone’s debt crisis ahead of a Parliamentary election Sunday.

The euro fell and demand for safe haven German bonds jumped after auction as investor fears about the stability of the whole the currency bloc grew.

“The result was dreadful. They didn’t manage to raise the full amount and the bid-to-cover is really poor. The fiscal profiles of Spain and Italy are different but their yields seem to be aligning now,” said Achilleas Georgolopoulos, rates strategist at Lloyds in London.

This is a complete failure of monetary policy. The money supply itself is draining out of countries like Italy, as investors fly to safety. And the central bank with the power to coin more euros has no interest in enacting any policies that arrest this slide. This is what is commonly called contagion. It looks quite like a bank run.

Spain has a Parliamentary election on Sunday, as is mentioned in this piece. But I don’t know that the accession of a center-right government, as expected, which will entertain another round of austerity, matters in the big picture. A bank run can only be stopped by an entity with the firepower to stop it. The Spanish government doesn’t actually have that power. The French and German governments sort of do, but they cannot reconcile their differences on how to engage the problem. France wants the ECB to step in, and Germany, still in their 80-year shellshock about inflation, doesn’t. Meanwhile the Obama Administration is basically begging the adults to take over in Europe and do what’s necessary. I believe the operative phrase from Obama to European leaders is, “I’m running for office, for Pete’s sake.”

The overall result here is that Europe is headed for some kind of collapse – hopefully just a recession – unless the central bank decides to be a central bank.

[image: Elena Schweitzer/shutterstock.com]

CommunityThe Bullpen

Euro Bank Run: Spanish Bond Yields Soar

We’re seeing a kind of bank run happening in Europe. The bond markets recognize that the European Central Bank is unwilling to save sovereign countries that cannot create their own money. So they’re just moving away from one country to the next, causing the cost of bond yields to rise to unsustainable levels. First it was Greece and Ireland and Portugal. Then it was Italy. Now it’s Spain:

Spain paid the highest rate to sell its 10-year debt since 1997 Thursday, just shy of the 7 percent mark seen as unsustainable, as the country is swept deeper into the euro zone’s debt crisis ahead of a Parliamentary election Sunday.

The euro fell and demand for safe haven German bonds jumped after auction as investor fears about the stability of the whole the currency bloc grew.

“The result was dreadful. They didn’t manage to raise the full amount and the bid-to-cover is really poor. The fiscal profiles of Spain and Italy are different but their yields seem to be aligning now,” said Achilleas Georgolopoulos, rates strategist at Lloyds in London.

This is a complete failure of monetary policy. The money supply itself is draining out of countries like Italy, as investors fly to safety. And the central bank with the power to coin more euros has no interest in enacting any policies that arrest this slide. This is what is commonly called contagion. It looks quite like a bank run.

Spain has a Parliamentary election on Sunday, as is mentioned in this piece. But I don’t know that the accession of a center-right government, as expected, which will entertain another round of austerity, matters in the big picture. A bank run can only be stopped by an entity with the firepower to stop it. The Spanish government doesn’t actually have that power. The French and German governments sort of do, but they cannot reconcile their differences on how to engage the problem. France wants the ECB to step in, and Germany, still in their 80-year shellshock about inflation, doesn’t. Meanwhile the Obama Administration is basically begging the adults to take over in Europe and do what’s necessary. I believe the operative phrase from Obama to European leaders is, “I’m running for office, for Pete’s sake.”

The overall result here is that Europe is headed for some kind of collapse – hopefully just a recession – unless the central bank decides to be a central bank.

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David Dayen

David Dayen