The effects of government debt market financialization: The case of Spain

The financialization of capitalist economies is closely related to the creation and commercialization of debt and its derivatives. This article demonstrates the relationship between the financialization of the government debt market and debt sustainability in Spain between 1996 and 2013. The article shows how the financialization of the Spanish government debt markets has been designed to favour liquidity through debt policy innovations, but on the other hand, it allowed investors to take speculative positions on the market’s perception of default risk. The quick growth of public over indebtedness to finance the government’s deficit and the costs of the financial system aid, produced a lack of credibility for Spanish debt sustainability and the government’s solvency. The article argues that the institutional mechanisms that allowed the transformation of the banking crisis into a sovereign debt crises lie in the micro structure of government debt markets and its degree of financialization.