THE INTEREST rate on Spanish government debt dropped briefly into negative territory yesterday.
It meant that for a short time, investors had to pay a small a fee to park their money with the Spanish government.
However, the real rate of interest – the amount of goods and services that can be purchased with money interest – remains positive as Spain’s inflation rate is estimated to have been minus 0.7 per cent in March. While investors may lose a percentage of their money, the prices of goods and services fall by a bigger percentage, leaving investors better off in real terms.
The fall in interest rates on government debt comes after the European Central Bank (ECB) began its programme of quantitative easing – creating new money to buy government bonds – which has boosted demand for government debt.
It marks a sharp turn of events for Spain compared with the middle of 2012, when the threat of default and Eurozone break-up almost pushed the interest on two-year bonds above seven per cent.
Yesterday, the interest rate on a two-year bond fell to minus 0.19 per cent, before rising just above zero later in the day.
Spain follows Germany, whose five-year bonds hit negative territory for the first time in January. All German bonds up to seven years now have negative interest rates. Negative interest rates on short-term debt are also being seen in France, the Netherlands, Belgium, Ireland and Austria.
It marks are sharp contrast from Greece, whose two-year bond yields are over 20 per cent.
Spain’s economy grew by 2.5 per cent in the first three months of 2015 compared with the same quarter in 2014. It is expected to grow at a similar rate this year. However, unemployment in the country remains high.