Government debt costs soar in Spain, slump in U.S.

A screen displays the IBEX 35 curve at Madrid's stock exchange on May 30, 2012. Spain's debt risk premium smashed euro-era records after the central bank chief quit early and Madrid scrambled to finance a major banking rescue.

Kai Ryssdal: We begin deep down in the inner workings of the global economy. The bond market and what it might tell us about the state of things.

In Europe today, the unwelcome spotlight fell on Spain. Greece had the day off, I guess. Spanish borrowing costs hit record highs. While, not coincidentally, yields on American Treasury bills hit record lows.

Marketplace's Heidi Moore in New York and Christopher Werth in London get us going.


Heidi Moore: Our government, like most governments, runs on borrowed money. When you buy a Treasury bond, you're not buying. You're lending. It's an IOU. You loan the government your hard-earned cash for two years, or 10 years, or 30 years, and Uncle Sam will pay you back with interest.

So far, it's been a pretty sweet deal. People and corporations and foreign governments have lent the U.S. government $11 trillion, at the latest count. They've never had cause to regret it, says Kathy Jones. She's the fixed income strategist with Charles Schwab.

Kathy Jones: People believe they will get their money back, it will be safe, that nothing untoward will happen to their money.

That security is why people will take a paltry interest rate of only 1.6 percent on U.S. Treasury bonds. It's a record low. But as my colleague Christopher Werth in London will tell you, it's the exact opposite in parts of Europe, right Chris?

Christopher Werth: That's right, Heidi. The interest rate that the Spanish government pays to borrow money rose to an all time, euro-area high today -- above 6.6 percent. Now, from an investor's perspective, that sounds like a good return on your money. But, Heidi, I spoke with Charles Dumas. He's with Lombard Street Research here in London. And I asked him if this is a good time to be investing in Spanish bonds.

Charles Dumas: Not unless you have an unbelievably strong appetite for risk. It is entirely possible that the entire euro structure will break up. So you would have lost a lot of money.

He says that because Spain has long been seen as a country that the rest of Europe couldn't afford to bailout. Spain has a high budget deficit that its struggling to bring down, its economy isn't growing, it has high unemployment, and now its faced with trying to pump money into a handful of failing banks. And, Heidi, that's what's forcing Spain's borrowing costs to rise so high.

Moore: That's why a lot of investors just wish they could book a little flight for their money to get it out of Spain when things get tough. They call it the flight to safety. It always lands here in the U.S.

Kathy Jones explained how it works.

Jones: Flight to safety means "get out of the way." This idea that you can go to the safest, most liquid market - liquid meaning you can get your money out any time you want to.

Sounds like a great plan, right? But actually, we have a lot of problems here too. Look around. We have high unemployment, the recovery is weak, and there's a risk that if the U.S. government can borrow at lower interests rates, it just gets hooked on borrowing. It can't go on like that. I mean Spain has seen that, right?

Werth: That's right, Heidi. Everyone here realizes there's a limit to how long Spain can go on borrowing so close to 7 percent. It's just too expensive. Ireland and Portugal got into that situation and they had to go looking for a bailout. Now, the question is how does Spain back away from this sort of cliff edge, as it were.

I spoke with Luigi Zingales at the Booth School of Business. And he says first Spain is going to need Europe's help in dealing with its troubled banks.

Luigi Zingales: At this point probably what I call a "Europe-ization" of the banking sector, which is different from a nationalization, but it's basically the same thing, but Europe takes over rather than the local government I think is probably the right solution.

But Heidi, the right solution last time, the trick that worked the last time borrowing costs rose so high, was when the European Central Bank pumped well over a trillion dollars into the European banking system just earlier this year.


Ryssdal: Heidi Moore in New York and Christopher Werth in London with another installment of the never ending European debt story.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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