Falling prices are great if you’re a consumer. They’re no good if you’re an indebted government.
One measure of this is the interest rate the government pays, adjusted for inflation. If tax revenues rise roughly in line with inflation – and they should move br0adly with the GDP deflator as a measure of total economy prices – then higher prices equal higher tax revenues and so more ability to service debt.
Higher inflation means higher nominal GDP growth, no matter what is happening to real GDP. The result is smaller debt relative to the size of the economy – even if price rises have not left voters any better off (as measured by real GDP growth). Because bond coupons are fixed, inflation is good for borrowers and bad for lenders.
Here’s the good news on Spain: nominal 10-year bond yields and the extra interest it has to pay relative to Germany are both sharply down.
Here’s something less positive: Spanish bond yields adjusted for the GDP deflator – in other words, how much help the Spanish debt is getting from nominal GDP growth.