Spanish Banks Get $ 125 Billion EU Bailout – But Investors Bet Against Spanish Debt – Yield On 10 Year Spanish Bonds Reach Historic High

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By Paolo von Schirach

June 12, 2012

WASHINGTON – Spain finally agreed to get a hefty $ 125 million EU bail out package for its tottering banks. This amount is more than double what the IMF estimated to be necessary to fix the problem. This generous cash infusion should have reassured markets. The message Europe wanted to convey is that Spain now definitely out of danger.

The markets do not believe it

Well not so. The markets did not buy the good news. The yield on Spanish 10 year bonds jumped to 6.68%, a historic high. But how is that possible? It makes no sense. Spain now is supposedly out of trouble –and the bond markets demand higher interests? (By comparison, the yield on the French 10 year bond is less than 3%).

The Spanish economy still in bad shape

It is possible. The markets simply do not believe that this is the end of the story. The Spanish banks may not go under, but only for now. The Spanish regional governments are still semi-bankrupt, the economy is in the tank, while there is an astonishing 24.5% unemployment rate in the country, with youth unemployment at a staggering 50%. Who’s going to fix that?

Europe can provide more liquidity; but it cannot solve systemic economic and fiscal problems. The markets know this and they bet against the Spanish debt.

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