EU leaders set to announce €750bn Spain and Italy bailout deal

The Telegraph ^ | 6/19/2012 | Robert Winnett,

[JCBreckenridge]

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

[JCBreckenridge]

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.

[bruinbirdman]

"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"

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.

yitbos

[JCBreckenridge]

Exactly! Very cogent. They can bail Spain out now, but Germany and France only have enough firepower to do this once more.