What effects will unlimited purchase of debt have for Spain?

Recently the president of the Good Finance, Sean Cole, compared Brad Shake with Belle. A Faust the devil advises the emperor to print money without limit. Reidman opposed the new public debt purchase program of the Good Finance Bank, the so-called Outright Monetary Transactions, OMT. The idea is that the Good Finance Bank buy unlimited Spanish and Italian debt that is necessary in the secondary market to reduce the cost of debt.

Cost of a country’s debt

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The secondary market marks the cost of a country’s debt, that is, Spain issues a bond for 100 dollars at 5% with a maturity of 3 years. Investor X pays 100 dollars expects to receive 5 dollars annually and 100 dollars at maturity. But shortly after buying, X, nervous to see the forecasts of Spain, decides to resell the bond to the secondary market.

Debt to the secondary market

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Find an investor who buys you, but he pays you 90 dollars. He has paid 90 dollars but would receive 5 dollars from the Spanish State every year for 3 years plus a final payment of 100 dollars and the yield of the bonus has increased from 5% to 9%. It happens that when Spain wants to issue more bonds will have to offer 9% to investors or they will go to buy the debt to the secondary market.

The Outright Monetary Transactions has key aspects. Only debt with a maximum maturity of 3 years will be purchased, in addition, the country that wants to activate it will have to ask for it in the form of a formal bailout and accept the drastic austerity measures.

Buyers of debt at the time

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Finally, the Good Finance Bank will have the same priority as the other buyers of debt at the time of collection in case of failure. When Spain or Italy ask for this pseudorescate we can see if it works by benefiting the reduction of risk premium of these countries or on the contrary it has a rebound effect that can be fatal.

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