Debt markets and risk premium. Macroeconomics invades our lives.

When a citizen wants to buy a car or an apartment and do not have the amount, is forced to borrow money. The economy of a state, works in a similar way but on a large scale.

The war economy

Suppose two countries go to war, when finished, you will have lost your opponent pay large sums of money , because the winner will calculate the economic cost to him has had the war and require the loser to pay the with interest. To some extent, a ransom has similarity with a war debt, ignoring, of course, the cost of human lives and destructive. The loser is at the mercy of the winner and can take many years, perhaps twenty or thirty in some cases, in order to adjust its economy and use the gains of the production process, to improve the quality of life of its citizens. Well, when a country asks for a bailout, should be made ​​to the idea that has lost a war .

Markets, loans and interest

Markets, the banks and other lenders are lenders that do not consider the feelings or emotion in their statutes. They pay money and want it back with interest and this equation prevails for the citizen requesting a small loan and asking for the state billions. Of course, the interests fluctuate depending on certain factors, most loan, plus interest, if the turnaround time is greater, interest and also the confidence generated if the loan recipient is low, the rate goes up. But it all comes down to this, the lender does not conform to impose interest rate risk based, also wants to ensure that the debtor is able to pay. What does it serves the recognition of debt and interest, if in the end they can not collect it? Then there is another requirement, the endorsement . When a citizen asks for a loan, the bank or lender, also impose a revenue guarantees will be required.

spain-rescue

But what happens when the loan requested by a country, with the aggravating their situation economically poor and confidence is generated is low? This, for the lender, is a double-edged sword. On one hand, the weakness of prompting, allows you to impose high interest rates, but on the other suspicious of repayment capacity. At this point, when markets impose guarantees to the states, forcing their governments to make social cuts that allows them to pay off the debt. In other words, markets are able to change the political course of a country that has trouble paying off their debts.

Markets and confidence

What interests vary with confidence, is nothing new. But depending on which is calculated confidence? Always measure is to compare and economic community like the European, comparisons are established with its locomotive production, in this case Germany. The calculation of the interest on the borrowed money, is calculated by means of a differential to the strongest economy. When this differential, called risk premium , exceeds a threshold that is considered the red line, the stakes are so high that the country can not afford them. That is the moment in which the markets are closed and you have to ask for help from other countries, comes the dreaded rescue.

Countries that rescue, intervene to rescue the economy and war begins. Impose a series of cuts in the short term and lead productive destroy social involution. This is basically the reason why governments, implement cuts, a prior, because if this does not achieve that markets will close their doors, avoid the rescue. The management of such cuts and implementation times will be decided at home and this medium and long term, is paramount. Countries in Europe have been demure, protest that have implemented all the requirements and are not improved. But they forget that these conditions are not intended to get them out of the crisis, so they can impose their debt.