Bill Gross Remains Skeptical of Spain
Earlier Thursday, European Central Bank President Mario Draghi indicated that the ECB may be ready to step up its bond buying program and take a more proactive role in fighting the European debt crisis. However, the famed bond investor Bill Gross remains unconvinced that Spain can avoid a full sovereign bailout even with ECB support.
Gross is skeptical that Spain, with sovereign bond yields still near 7 percent, can stay solvent in the long run. New debt, he reasons, carries high interest rates that threaten to cripple the economy with interest expense for years to come. He notes, however, that the 50 basis point drop in yields is a step in the right direction. But Spain will need another 400 basis point drop, Gross says, in order to ensure that Spain will remain solvent in the long run.
Gross has a point with Spain. Debt is not as big of a problem for the country as deficits are. Italy, on the other hand, has too much debt but a manageable deficit. Spain's debt-to-GDP, lower than other crisis-stricken nations and even that of the U.S., will inevitably have to rise as tax revenues continue to collapse and spending cuts cannot make up the gap. As Spain continues to miss deficit targets, more debt will need to be issued. Yields are near record highs, so interest alone would bankrupt the nation.
Observers are wondering whether the ECB targeting lower bond yields will be part of a new policy response next week. Should that be the case, it may take Spain out of the spotlight and shift focus to other macroeconomic issues such as the fiscal cliff and the debt ceiling in the U.S.
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