The Spanish death spiral has begun

The situation in Spain has turned decidedly worse today. After yesterday's 3-notch downgrade by Moody's, yields on Spanish 10-year bonds are now hovering just around 7%. Credit default swaps for Spanish debt are now trading at 605 bps with a 40% chance of default over the next five years. These are the market indications that the Spanish bank bailout package is not credible. And for good reason; as details of the discussions surrounding Spain come to light, it is now clear how harsh the terms of the bailout could be.

Here is what I am hearing:

Penalty rates. There are scenarios being considered under which Spain would pay 8.5% for the bailout funds instead of the 3% being bandied about now. I assume this rate is a penalty rate associated with the Spanish drawing from the temporar...


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