Europe shaken by fear Spain will need full bailout

FRANKFURT, Ger­many (AP) — Europe is on the brink again. The cri­sis over too much debt in the 17 coun­tries that use the euro flared dan­ger­ously on Monday.

Fears that Spain was next in line for a full-blown gov­ern­ment bailout inten­si­fied fol­low­ing a week­end of bad news about Europe’s fourth-biggest econ­omy. Madrid’s bor­row­ing costs on its 10-year bonds — an indi­ca­tor of mar­ket con­fi­dence in a country’s abil­ity to man­age its debt — hit an alarm­ing record of 7.45 per­cent dur­ing morn­ing trad­ing, pushed up by reports that the country’s indebted regions might join its banks in request­ing expen­sive bailouts.

Stocks slid con­ti­nent wide. Germany’s DAX fell 1.7 per­cent. Britain’s FTSE was off 1.7 per­cent. The French CAC 40 was off 2.0 per­cent. The euro fell to $1.2118.

Yet it was far more than just Spain’s struggle.

Bor­row­ing costs also rose in Italy, which has been caught up in fears that it may soon be pushed into ask­ing for assis­tance. Italy’s econ­omy is stag­nat­ing and mar­kets are wor­ried that it may soon not be able to main­tain its debt bur­den of (EURO)1.9 tril­lion ($2.32 tril­lion) — the world’s third-largest bond mar­ket after the United States and Spain.

Greece, already into its sec­ond bailout and strug­gling to keep its mem­ber­ship in the cur­rency bloc, faces tense nego­ti­a­tions with its inter­na­tional cred­i­tors who are los­ing patience with the country’s attempts to reform its economy.

Ire­land, Greece and Por­tu­gal have already taken bailout loans after they could no longer bor­row afford­ably on bond mar­kets. Yet those coun­tries are tiny com­pared to Italy and Spain, the third– and fourth-largest economies in the euro­zone. Ana­lysts say a full bailout for both would exceed the other euro­zone coun­tries’ resources.

The mar­kets fear the prospect of double-disaster: Spain need­ing a bailout that would strain the eurozone’s bailout funds, and a pos­si­ble Greek aban­do­ment of the euro that could spread even more fear across the eurozone.

Right now, Spain has received a com­mit­ment of up to (EURO)100 bil­lion from other euro­zone coun­tries to bail out its banks, which suf­fered heavy losses from bad real estate loans. Euro­zone finance min­is­ters signed off on the aid Fri­day and said (EURO)30 bil­lion would be made avail­able right away. But that incre­men­tal step cut lit­tle ice with investors. The spec­u­la­tion is wide­spread that the gov­ern­ment may need its own, direct bailout.

On Sat­ur­day, Spain’s For­eign Min­is­ter José Manuel Gar­cía Mar­gallo pleaded for help, say­ing that only the Euro­pean Cen­tral Bank could halt the panic. But the ECB has shown lit­tle will­ing­ness to restart its pro­gram to pur­chase the gov­ern­ment bonds of finan­cially trou­bled coun­tries. The cen­tral bank has already bought (EURO)200 bil­lion in bonds since May 2010 but lit­tle real impact on the crisis.

“Events since Fri­day have been a clear wake-up call to any­one who thought that the Span­ish bank res­cue pack­age had bought a calm sum­mer for the euro cri­sis,” ana­lyst Carsten Brzeski said. “Greece is back… This does not change the eco­nomic analy­sis of the impact of a pos­si­ble Greek exit but it shows that patience in at least the biggest Euro­zone coun­try is reach­ing its limits.”

In the case of Greece, the coun­try is depen­dent on for­eign bailout loans to pay its bills. A cut­off of aid over its inabil­ity to meet the loan con­di­tions would leave it with­out any source of financ­ing — and could push it to exit the euro so it can print its own money to cover its debts.

Germany’s econ­omy min­is­ter, Phillip Roesler, said the prospect of Greece leav­ing the euro was now so famil­iar it had “had lost its hor­ror” and that he was skep­ti­cal Athens would meet con­di­tions for con­tin­u­ing res­cue money.

Posted by Randa Wagner on Jul 23 2012. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.