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Thought Everything Was Fixed: Spanish 10Y Breaks 6%


The shine was coming off Draghi’s rally late last week but since mid-morning on Friday, Spain’s 10Y spread has risen a very notable 36bps and the 10Y yield has just broken back above 6% for the first time in over two weeks. However, the seemingly impregnable short-dated market has started to crack. Spain’s 2Y has also broken back above 3% – up over 50bps in the last 3 days! It seems the reality of the cash position, as we described in detail last night, is perhaps starting to outweigh the unlimited-but-capped open-ended-but-conditional support that the ECB supposedly has.


Spain is rapidly running out of cash: its consolidated cash balance has plunged from over €50 billion in March to just over €20 billion in July and dropping at an alarming rate. The cause for this drop: a budget deficit that refuses to go away, and with ~25% unemployment, what the government does to the tax rate is irrelevant as the Laffer curve crosses into the twilight zone of the Laughter Curve.

Enter the chart that Rajoy wishes did not exist: the net cash in/outflow into the Spanish treasury due to bond/interest activity.

As is quite obvious on the chart above, and explains Goldman’s urgency with a formal Spanish ECB activation request, the closer we get to October, the closer Spain gets to running out of cash. And in that particular case none of the currently implemented reality countermeasures will do anything to hide the fact that Europe’s emperor was naked from the very beginning.



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