All eyes will be on Spain tonight as it prepares to auction between €1.5 and €2 billion in two- and 10-year bonds. According to Forbes:
‘The first batch of Bonos del Estado carry a coupon of 3.30% and mature on October 31, 2014; the second batch, Obligaciones del Estado, mature on January 31, 2022, and carry a coupon rate of 5.85%.’
Flogging the two-year Spanish bonds won’t be a problem. The 10-year bonds (Obligaciones) more than likely will be.
Generational wisdom certainly hasn’t endured when it comes to lending to the European periphery. Pre-euro, raising money in the international bond markets was a costly exercise for these countries.
‘The market’ – suspicious of default and/or inflation based on centuries of experience – set a very high interest rate on loans.
The House of Rothschild tells the story of Nathan Rothschild making an uncharacteristically risky loan of 15 million francs to Spain in 1834. It was against the advice of Metternich of Austria and most of his Rothschild brothers.
Almost as soon as he handed his money over, the loan went bad. A new Finance Minister took over in Madrid and reneged on the deal. James, Nathan’s brother in Paris, implored Spain’s representative in the city ‘All I want you to declare is that we will get our money back and I ask nothing further of you.’ He had no luck
‘My dear Nathan’, he later wrote, ‘we don’t have any troops to force the government to do that which it does not want to do.’
Two years later, a dying Nathan’s last instruction to his sons was to sell Spanish bonds.
Even now, that seems like pretty good advice.
for The Daily Reckoning Australia
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2012-04-13 – Eric Fry
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Beware the Big Government Debt Switcheroo
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The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 – Nick Hubble