The pattern I’m seeing in Europe these days is that each “solution” is given less and less time to work before the markets go right back into crisis mode. And indeed, that’s where we are. The Spanish bank bailout lifted spirits on Friday, and by Monday everyone went back to the same worries. Global markets dipped. Spanish debt yields are soaring, approaching the 7% danger zone seen as impossible for sustained financial management of a sovereign. The rate is up 5% just today. Fitch downgraded 18 Spanish banks.
The controversy over whether the €100 billion bailout was really a bailout or just a line of credit is now a second-order issue; Spain is looking doomed in either case.
Investors worried about uncertainty over the amount of bailout money Spain would take, the mechanism for providing it and the conditions attached to the deal.
“The size of the deal is meant to show a real commitment on the part of the eurozone to stabilise the system,” said Robert Pavlik, of Banyan Partners. “However, this just moves the problem down the road and shows how nervous the EU was going into the Greek election.”
Indeed, in their bid to stop contagion from Greece into the southern periphery, the bailout only spread worries to Italy, providing exactly the kind of contagion it was meant to avoid. What’s more, the real problem for the Eurozone is that their seat-of-their-pants approach to this, with Spain being offered the bailout under existing austerity terms but with no additional fiscal measures demanded (the claim being it’s a bank bailout so the only reforms in exchange are financial ones), the countries already knuckled under by the troika (EU, ECB, IMF) are starting to get angry:
But those countries already under troika control warned that they will demand a revision of their bailout terms if Spain receives special treatment.
“We will be watching the process of the specific programme for Spain’s banking system closely,” Portugal’s prime minister Pedro Passos Coelho said.
“We cannot have first class and second class states,” warned Portugal’s opposition socialist leader Antonio José Seguro.
Ireland’s prime minister, Enda Kenny, has already said that if Spain wins soft terms, then these must be offered to others.
That includes Greece, especially if the anti-bailout Syriza wins on Sunday.
Italy, meanwhile, as the third-largest economy in the Eurozone, stands to have to pay into this bailout fund for Spain, when their economic state is in bad enough shape.
At this rate, the next “solution” for Europe will fall apart as it’s being read.