Skip to comments.EU leaders set to announce €750bn Spain and Italy bailout deal
Posted on 06/19/2012 10:31:33 PM PDT by bruinbirdman
European leaders are poised to announce a 750 billion euro deal to bailout beleaguered Spain and Italy by buying the countries debts.
Pan-European Government funds are set to be used to buy Spanish and Italian bonds, which have recently hit record highs in a move which will send a strong signal to financial markets that the German administration is prepared to back its weaker economic neighbours.
Angela Merkel and other European leaders have come under intense pressure at this weeks G20 summit to take radical action to stem the growing euro crisis which has pushed up the cost of Spanish bonds to unsustainable levels.
Francois Hollande, the French President, said: It will be more on mechanisms that allow us to fight speculation.
The French president said rates paid by Spain and Italy to borrow on debt markets were unacceptable.
We must show a much faster capacity for action, Mr Hollande said.
Under the proposed deal, two European rescue funds the 500 billion-euro European Stability Mechanism (ESM) and the 250-billion euro European Financial Stability Facility (EFSF) will be able to buy bonds issued by beleaguered European countries.
Previously, money in these funds which has been provided by members of the single currency has been used to bailout smaller European countries such as Greece, Portugal and Ireland. Governments in these countries are offered money direct return for agreeing to austerity programmes.
Under the new plan, the money in these funds will not be given directly to governments but will instead be used to buy up debts on the financial markets. The European Central Bank previously bought about 210 billion euros of bonds in this way but stopped last year.
It is hoped that the new plan will drive down the cost of Spanish
(Excerpt) Read more at telegraph.co.uk ...
750 billion is enough to push spain from a ratio of 60 percent of Debt/GDP up to around 110 or so.
Think of it this way. They have borrowed money on credit at, say several percent. Spain has to roll over the money that it borrowed (ie, pay out), when the term comes due. What has been happening is that instead of 2 percent, Spain is looking at 7 percent. At 100 percent of GDP - if borrowing costs hit 7 percent, that means that a full 7 percent of the economy is spent just on nedebt
Germany + France have enough elbow room to do one more of these for about 1 trillion, less if Hollande manages to spend things up domestically. Would take about one or two years for Hollande to do that.
Which leaves Germany at 500 billion.
So the reckoning is almost at hand.
Think of it this way: The 7% is on the benchmark 10 year bond. 7% compounded equals the principle in 10 years.
Now, if Spain could borrow at Germany's 2%, after 10 years there would be plenty left over for other things. They could even borrow to pay interest for a while.
At 7%, Spain is paying out, in interest, the entire value of the bond in the 10 years to maturity. They must roll over all bonds 'cause there is nothing left for maturity redemption.
When the benchmark hits 7% a country is doomed in short order.
Yes, even USA 10 years his 7%+ in the '80s, but not for long and the benchmark was 20 year bonds.
Spain can do 7%, but not for long, ergo the plea for help.
Exactly! Very cogent. They can bail Spain out now, but Germany and France only have enough firepower to do this once more.