2 thoughts on “The ECB cannot save Spain”

  1. Posted 13/08/2012 at 13:25 | Permalink

    The problem with Spain is one of multiple equilibria for bond yields. If yields were low, then Spain’s debt load would be manageable (given a long-term federal solution for the Eurozone) – justifying the low yields. However, when yields are high, then default risk starts to become a problem, justifying the high yields. ECB intervention is perfectly justifiable in order to move from the ‘bad’ equilibrium – high yields – to the ‘good’ one. Indeed, if the ECB hadn’t been so very publicly hesitant to buy Spanish bonds – if it had never been in doubt that they were willing to intervene – it is highly unlikely that the situation would have got this bad in the first place.

  2. Posted 13/08/2012 at 17:36 | Permalink

    Not really. Spanish primary deficit is around 6-7% of GDP. The problem does not come from the rising financial costs, but from the structural budget imbalance. ECB interventions would help almost nothing and, since they could delay spending cuts, they would in fact worsen the problem.

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