A Lesson on Spanish Bonds from The House of Rothschild

All eyes will be on Spain tonight as it prepares to auction between €1.5 and €2 billion in two- and 10-year bonds. According to Forbes:

‘The first batch of Bonos del Estado carry a coupon of 3.30% and mature on October 31, 2014; the second batch, Obligaciones del Estado, mature on January 31, 2022, and carry a coupon rate of 5.85%.’

Flogging the two-year Spanish bonds won’t be a problem. The 10-year bonds (Obligaciones) more than likely will be.

Generational wisdom certainly hasn’t endured when it comes to lending to the European periphery. Pre-euro, raising money in the international bond markets was a costly exercise for these countries.

‘The market’ – suspicious of default and/or inflation based on centuries of experience – set a very high interest rate on loans.

The House of Rothschild tells the story of Nathan Rothschild making an uncharacteristically risky loan of 15 million francs to Spain in 1834. It was against the advice of Metternich of Austria and most of his Rothschild brothers.

Almost as soon as he handed his money over, the loan went bad. A new Finance Minister took over in Madrid and reneged on the deal. James, Nathan’s brother in Paris, implored Spain’s representative in the city ‘All I want you to declare is that we will get our money back and I ask nothing further of you.’ He had no luck

‘My dear Nathan’, he later wrote, ‘we don’t have any troops to force the government to do that which it does not want to do.’

Two years later, a dying Nathan’s last instruction to his sons was to sell Spanish bonds.

Even now, that seems like pretty good advice.


Greg Canavan
for Markets and Money

From the Archives…

What the News on Bond Yields Say About the “Resolved” Eurozone Crisis
2012-04-13 – Eric Fry

The Art of Selling Stocks
2012-04-12 – Chris Mayer

Misguided Faith in an Economic Recovery
2012-04-11 – Joel Bowman

Beware the Big Government Debt Switcheroo
2012-04-10 – Dan Denning

The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 – Nick Hubble

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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Walter Lippman

Anyone who understands debt-based currency will take this article as a grain of salt. Backing the idea that Spanish bonds are worthless upon what a Rothschild told a lot of years ago is quite childish and unenlightened. I wonder who could anyhow believe the ideas expressed by Mr Caravan.

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