Spain Financial CrisisBuried deep in the depths of the daily news assault, or banished to the very periphery of your news feed, you may recently have heard or read the phrase "rising Spanish bond yields." If the remark registered at all, your brain would likely have filed it under "irrelevant."

As it turns out, these four little words are very relevant.

Lately, "rising Spanish bond yields" has been code for the potential return of economic crisis in Europe, something that, with two Greek bailouts already on the books, many hoped was over.

Here's a primer on the bond market, a look at what's happening in Spain, and why those four little words should make all of us very nervous.

The Simple Scoop on How Countries Get in Debt Trouble

When you need money over and above what you have in your checking account or stuffed in your mattress, you go to the bank and take out a loan, promising to pay the bank back its money over a defined period of time, plus interest. That's how banks make money. When a company needs money, it can also get a loan or issue what's called a bond.

A bond is a debt instrument in which a group of investors loan a company a certain amount of money for a certain period of time and receive ongoing interest payments in return. That's how bond investors make money. At the end of the agreed-upon period of time, the bond matures, and the company returns the original amount of the bond to the investors.

When a country needs money over and above what it's taking in from taxes, it too issues bonds, called sovereign bonds. And just like with a company, when a country can't keep up with the interest payments on its bonds, it can default on its debt.

The Bond Market Demands its Pound of Greek Flesh

This is essentially what happened in Greece. Since the early 2000s, the country has issued an Olympian-sized number of sovereign bonds, going deep into debt on the bond market. As word got out in 2009 that the country was running a significantly higher fiscal deficit than previously thought, the bond market got nervous about Greece's ability to make good on its debt and therefore started demanding higher interest rates on new Greek government debt.



As a result, interest rates on debt rose to a point where the country was no longer able to keep paying investors. Greece was clearly headed toward default.

Since no one was certain how a Greek default in the tightly knit, globally connected eurozone would play out on the world economic stage, Europe organized two enormous bailouts designed to keep the country solvent.

The Pain in Spain Falls Mainly on the Rest of Us

This is where you and I come in. Greece's economy is the 11th largest in the eurozone. Spain's is the fourth. Right now, Spain is struggling to control its deficits and is at the top of the list of the bond market's worries. As such, interest rates on Spanish debt are rising.

The fear is that there will be a repeat of Greece -- in other words, interest rates on Spanish debt will get so high the country will also need a bailout to keep from defaulting. Given the size of Spain's economy, that's a default that Europe may not be able to afford.

Now, back to us. Between banking and business, America and Europe are inextricably linked. Europe is currently in a recession, and after years of being in recession itself, the U.S. is on the edge of a very fragile recovery. If the bond market pushes interest rates on Spanish debt up to the breaking point, and Europe can't manage a bailout and Spain defaults, there's concern that the ensuing economic shockwaves could cross the Atlantic and send us back into recession.

Regarding the banks in particular, American and European banks were at the heart of the financial crisis and are still recovering from the beating they took. Banks that hold significant amounts of Spanish government debt could be tipped into insolvency by Spain's default on that debt.

From our own experience at the height of the financial crisis -- when the banks stopped lending to each other, to businesses, and to those of us who needed to buy cars and houses -- we know that when the banks aren't working, nothing's working.

So the next time you hear "rising Spanish bond yields," prick up your ears, and tell your brain to file those four little words under "frighteningly important."

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Tj

Interesting article but isn't the US already buying over 50% of it's own bonds to keep the rate from going through the roof? If Obama is re-elected and refuses to cut spending, he will exhaust what little good credit is left and be forced to buy all of the US issued bonds. Of course this will lead to a hyper-inflationary situation. If Mitt is elected, he will have to cut spending and incur the wrath or keep spending and continue the Obama practices. I assume that he will keep the printing presses going as he is an obvious Republicrat. This leads us back to hyper inflation. Maybe it is time for someone to suggest that the people (or maybe the sheeple) begin to prepare for a hyperinflationary future. Remember, the future belongs to the prepared...

April 29 2012 at 12:29 AM Report abuse rate up rate down Reply
Daarck Knight

The Reverend JAA denigrations will continue throughout “Total Restoration” and the British PIGG is dead.

Other News – Party of Christ

The Daarck Knight team is now employed by Regulators and Share Holding Associations.
Sweeps across NYSE, ARCA floors and exchanges expect to remove, at least, 27 La Cosa Nostra operatives.
Sweeps across ALL Brokerages & Hedge Funds and quarterly
How ELSE do U think they R doing this America?
The answer is;
Of course, they have operatives inside the Brokerages & Hedge Funds
2 CLOSE THE LOOP
Between the NYC Great Satan and it’s spewed disciples littered throughout.
Daarck Knight stands 8 feet tall. He is transparent with a black outline. He has black frame viewers inset with jewels from past REWARDS and each holding libraries of past, present and future criminals and their events.

April 24 2012 at 9:22 PM Report abuse rate up rate down Reply
wapitibowhunters

1 more term for Obumma and this country will be gone too. Bankrupt

April 24 2012 at 9:18 PM Report abuse +1 rate up rate down Reply
ajt1025

Well we had a good run. Today is the last day of what use to be great. Greed and currupt politicians will distroy this country for good. Their pockets will be filled and no place to spend it.

April 24 2012 at 7:40 PM Report abuse +1 rate up rate down Reply
wstrvlr

Glad I do not have stocks & haven't for some years now. I cashed out BEFORE the markets tanked in 2008. Glad I did too! I feel for folks whose retirement accounts lost so much of their value & now they are having to work longer than they planned now.

The world economy is FAR from out of the woods. All any investor & broker should have done was look at the markets back in 1929 BEFORE & AFTER the bust. The global economies are taking similiar moves as they did then. Get ready for a repeat of 1929 sooner than folks realize.

Down size your homes, get out from under debt as fast as you can. After getting debt-free save all you can. Stock up on things as you can. Learn how to grow a garden, learn how to can what you don't eat from that garden. Live frugal as soon as you possibly can. When the next bust occurs it's going to get dangerous in the cities. Move away from them as soon as you can.

It's not a matter of "IF" another crash is coming. It's a matter of "WHEN" it happens.

April 24 2012 at 6:10 PM Report abuse -1 rate up rate down Reply
WilsonRev1615

So, when we're a world-wide socialistic society, who bails who out then? lol, that was originally intended as a joke but I'm actually curious what our good ol' commander in chief would offer...

April 24 2012 at 3:37 PM Report abuse +3 rate up rate down Reply
sstuczynsk

Are we next?

April 24 2012 at 3:32 PM Report abuse +1 rate up rate down Reply
Bruce

That's not the socialist way of thinking. Tax lots, and spend lots, and blame someone else. This is our current regime's way of fixing the economy.

April 24 2012 at 3:10 PM Report abuse +2 rate up rate down Reply
bpilk5650

I just wish the congress had worked better with our president to put the US economy in a place that we could help them more.

April 24 2012 at 3:00 PM Report abuse -3 rate up rate down Reply
1 reply to bpilk5650's comment
grampz05

Are you on drugs?

April 24 2012 at 4:30 PM Report abuse +1 rate up rate down Reply
bpilk5650

I just wish that the president here would have had the co-operation of congress so he could have put the USA in good enough economic stability for US to help them out more.

April 24 2012 at 2:59 PM Report abuse -3 rate up rate down Reply