Spain sovereign risk: CDS breaches 100 points

Spain's CDS breaks 100 points and trades at 114.89

Insuring ten million euros in Spanish government bonds cost €104,500 on Friday. This is the price of Spain's Credit Default Swap (CDS), which closed at 104.5 basis points: the first level above 100 since June. The figure seems modest until compared with others. Protecting the same amount of US debt cost 37.5 basis points; Greece, the other declared sick man of the eurozone, paid 274.33. Thus, Spain's risk premium surpassed a threshold that had been enough to halt the rise in June, and a Cotizalia analyst deemed breaking it in the short term unlikely.

How Spain's CDS moved from 69.6 to 114.89 points

The move was not sudden. In October, insurance against Spanish debt default hit its lowest level since the crisis began: 69.6 basis points. By mid-November, it had already exceeded 80. On December 9, the day Standard & Poor's downgraded the rating outlook to negative, it jumped from 89.3 to 96.7 in a single session, according to market data. It was not a one-day adjustment: the climb continued past 100 on Friday and, in subsequent days, the indicator marked 109.38 and then 114.89, equivalent to a default risk near 10% according to circulating calculations.

The spread with German bonds monitored by the Treasury

The CDS is not the only thermometer. The ten-year Spanish bond offered a yield of 3.99% versus 3.24% for the German Bund: a 75-point difference. This spread measures what investors demand for lending to the Spanish state instead of Germany, and it conditions every auction. The rise has been general worldwide, with Germany as the main exception, but proportionally Spain's increase surpasses most European partners, excluding Greece. Deteriorating expectations about the Spanish economy, particularly regarding the public deficit, are the most repeated explanation.

Can a state go bankrupt without stopping debt issuance?

Yes, but not indefinitely. The thesis circulating among widely read analyses is that public debt trinc a sigmoidal function: a point is reached where required yields jump sharply and the state loses buyers. Until then, a country in default remains safer than any private issue from that same country, granting it almost unlimited financing capacity. Greece issued a full bond in December with a CDS above 200, and no one panicked. The problem is not issuing today, but at what price issuance will occur in six months.

Greece, 300 points, and the contagion effect

The Greek CDS surged 34 basis points to 274.33 and kept rising: 278, 280, heading toward 300. Moody's cut the Hellenic rating from A1 to A2 with a negative outlook, and the market took it almost as good news because it did not drop to A3, the step that would have left Greek debt outside collateral accepted by the ECB. The underlying discussion is whether Greek deterioration transfers to Spain. Some argue contagion is not automatic and that Spanish premiums have held up better than antiestéticared; opposing this is the argument that Brussels will eventually bail out Athens and, once bailed out, all eyes will turn to the next country on the list. The scenario being managed: a lifeline with conditions, a few months of calm, and a second liquidity package arriving when it becomes clear that little has been done.

Spain has defaulted fourteen times already

Historical records are uncomfortable. The Kingdom of Spain stopped paying in 1557, 1575, 1596, 1607, 1627, and 1647, roughly every twenty years, and did so again or converted its debt into illiquid assets in 1809, 1820, 1831, 1834, 1851, 1867, 1872, and 1882. That country was a power. The AEB (Spanish Banking Association) noted that Spain would have an 8% GDP deficit even without recession, highlighting difficulties in reducing it, and firms like Credit Suisse or Moody's rank the country top in the developed world for financial risk. Standard & Poor's called for a national pact to cut the deficit in its report.

With the CDS at 114.89 and estimated default risk at 9.99%, the state continued issuing debt without visible difficulties. The market pricing disaster does not miccionan it stops buying. Yet.