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Isabel Rodríguez Tejedo, School of Economics and Business Administration, University of Navarra, Spain

Problems for families

Mon, 27 Jun 2011 10:45:39 +0000 Published in La Razón (Madrid)

What does the increase in the risk premium imply?
The risk premium can be understood as a way of measuring the Degree confidence of investors in our ability to pay. Let's imagine that you are thinking of buying government bonds. At the same yield, what would you prefer, the peace of mind of knowing that you are buying from a compliant government, with a Economics without major scares and little chance of unpleasant surprises, or something riskier? Clearly, at the same yield, why expose yourself to uncertainty? The recent rise therefore implies that the State has to offer greater compensation to investors to convince them to buy our debt.

To what extent could it be dangerous for Spain?
The importance of the risk premium goes beyond the mere opinion of the markets about our Economics. A rise means that a larger part of the State's income will go to debt, and the money used in this way cannot be used for other purposes (such as paying pensions, or financing the health system, Education or infrastructure).

On top of all this, the stock market (especially in situations of high uncertainty and volatility) may react adversely to the increase in the risk premium. In addition, in these circumstances, domestic banks typically find it more difficult to obtain funding on the interbank market, which may affect their ability to subsequently provide credit , and the price at which they will be willing to do so.

Who is affected by all this process?
This has an impact on companies, which need it for their operations, and indirectly may affect the country's employment . Families are also feeling the effects of the possible increase in the cost of credit and the loss of wealth caused by the fall in the price of their stock market assets, which could in turn lead to a reduction in consumption, on their Economics .