Spain: slouching toward panic.

Spain's brush with Socialist rule has exacerbated its economic plight. The Socialists ran up huge deficits, the banks bought up the bonds to finance the deficit and both the Spanish govt and Spain's banks are insolvent.

We can see the developing panic in bond rates the country has to pay and the state of its banks. Yesterday (Monday), Moody has downgraded 28 Spanish banks, some of them all the way to junk status. How come the banks are failing? Because they hold a lot of govt bonds and as the interest the govt has to pay rises, the value of the bonds with lower interest lose value. And the bond rates are skyrocketing. The latest auction ($3.9B) saw the interest rate on 3 month bonds rise to 2.39% from 0.85% and six month rates rise to 3.24% from 1.7% in May.

The increasing cost of borrowing raises the deficit, which calls for more bonds, which fuels the rise in rates which adds to the deficit. The process has become self-sustaining and is gathering speed.