Headed-for-bankruptcy governments in Europe are able to borrow for fifty years at extremely low interest rates, thanks to European Central Bank lunacy. This, of course, will end badly. From Don Quijones at wolfstreet.com:
Negative-Interest-Rate absurdity is another “rabbit out of the hat.”
For the second time this year, Spain’s caretaker government just managed to sell 50-year bonds in a €3 billion ($3.4 billion) deal. Despite maturing in the year 2066, when many of us won’t even be alive and the duty to pay back the debt (assuming it still exists) will have been handed down to our children’s children, the bonds will pay an annual interest rate of just 3.45%. Not only that, but the issuance was over-subscribed by €7 billion.
This is a mind-blowing turn-up for a country that just four years ago needed an unprecedented bailout from the Troika to save its saving banks and avert total financial collapse. It is also a resounding testament to the power of central bank policy to turn economic reality on its head.
Less than three years ago, when Draghi had only just begun doing “whatever it takes” to save the single currency, the Spanish government had to pay a 5% yield to get investors to buy their one-year bonds. Now investors are willing to take 50-year bonds off the government’s hands in exchange for an annual interest rate of 3.45%, despite all the attendant risks involved.
While the Spanish economy has improved somewhat since then, that is largely due to the fact that the government has sacrificed long-term stability for short-term growth, going so far as to plunder half of the nation’s social security reserve fund in order to keep spending at its current levels. The remaining half is exclusively invested in Spanish bonds. Even Brussels now admits that Spain’s public debt is out of control.
To make matters worse, Spain doesn’t have an elected government to speak of and could struggle to form one even after the next round of elections, on June 26.
None of that seems to matter, though. Global investors, mostly from Germany, Austria, Switzerland, the UK, Ireland, US and Canada, are now so desperate for yield that they’re willing to hold their noses, say a few Hail Maries and place millions of euros of their clients’ money on a half-century gamble.
The longer the maturity a bond has, the further its value will drop in response to a rise in interest rates.That hasn’t stopped investors snapping up super long-term bonds from a number of European countries. In April, the French treasury flogged €9 billion of debt, with one tranche maturing in 2036 and the second in 2066. The interest it paid on each tranche was just 1.25% and 1.75% respectively. Italy, home to banks that are stuffed with as much as €360 billion of bad debt, is also “evaluating” demand for a possible 50-year offering. Some Treasurys have gone even further, with Ireland and Belgium both selling €100 million of 100-year bonds this year.
Obviously, none of this would be conceivable if it weren’t for the ECB’s increasingly unconventional interventions in the financial markets. Thanks to its rampant government (and soon to be corporate) debt buying, free bank lending and negative interest-rate setting, the global stock of negative-yielding debt is estimated to have reached $8.26 trillion by May 1, which is equivalent to 23.6% of global fixed-income assets. That’s up from $4.92 trillion at the start of the year.
To continue reading: ECB Admits: “We’re the Magic People” in a Clown Show
