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Spanish borrowing costs put new pressure on euro zone

No solution in sight amid calls for new bailout for Spain.

Spain protest 07 24 2012Enlarge
Spanish workers have protested against austerity measures this week. (Dominique Faget/AFP/Getty Images)

BRUSSELS, Belgium — Firefighters hope easing winds and rising humidity will help them contain deadly wildfires sweeping across parts of northern Spain. Getting the country's smoldering finances under control will take far longer.

Days after euro zone finance ministers approved a 100 billion euro bailout for its ailing banks, Spain is suffering some of its blackest days on the markets since the European debt crisis first ignited almost three years ago.

Spain and Germany issued assurances on Tuesday that Madrid will not need a full bailout. But the country is facing record borrowing costs as government coffers run low, pushing the euro crisis to a new level of intensity many believe can be resolved only by a comprehensive solution opposing camps in the European Union show no signs of reaching.

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Spain isn’t the only major concern.

At the other end of the Mediterranean, new fears are growing that Greece will be forced out of the euro.

The new government in Athens appears unable to meet its commitment to slash its deficit and lenders are responding with threats to sever bailout lifelines keeping the economy afloat.

"There can be no further payments if Greece no longer meets its requirements," German Economy Minister Philipp Rosler said on ARD TV network on Sunday. "A Greek exit has long since lost its horror for me."

Concerns for the whole euro zone surged further after the mounting crisis prompted a warning from the ratings agency Moody's raising concerns over the outlook for Germany, the Netherlands and Luxembourg, all supposedly healthy countries.

The New York-based agency said they are increasingly exposed either to the risk of instability from a possible Greek euro zone exit or from liabilities extended to cover the costs of keeping the euro zone together through support to southern countries.

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Spain's key 10-year borrowing rate rose above 7.6 percent on Tuesday. That's far above the 7 percent level that forced Ireland and Portugal to appeal for rescues from the IMF and European Union.

With shorter-term borrowing costs also surging, Spain is unlikely to be able to sustain paying such interest rates beyond the summer. "We've got enough liquidity to keep us going for three months," the Barcelona daily La Vanguardia quoted an anonymous senior government member as saying on Sunday.

Madrid's stock exchange saw its key IBEX35 index fall over 3 percent Tuesday to reach its lowest level since 2003.

The drop came despite a ban on the short selling of stocks introduced by Spanish and Italian regulators on Monday as part of an effort to counter speculative trading. The Spanish index is down almost 28 percent since the start of the year.

Although an EU deal concluded last week brought some relief to Spain's banks, the country has complained about delays in implementing aid measures as concerns have extended to regional administrations.

On Tuesday, Catalonia, the country's second-richest region, indicated it would seek a bailout from the national government, following a rescue request from the Valencia region last week.

"Catalonia has no other bank than the government of Spain," Catalan Finance Minister Andreu Mas-Colell told the BBC. "We are taxpayers in Spain and it's normal that we appeal to the Spanish Treasury’s banking services."

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Spain has set up an 18 billion euro fund to support debt-ridden regions that Spanish and European Union officials say is sufficient to cover any likely requests. Catalonia is believed to need just over 7 billion euros to cover its finances to the end of the year.

The creeping regional debt crisis further spooked markets, as did signs the 65 billion euro in budget savings the government recently announced would probably prolong the country's recession beyond 2013.

Spain's bank bailout transferred market jitters from the private sector to the national debt because the money will be channeled through the state, which is obliged to guarantee loans.

That’s reinforced a growing realization that the only way to save Spain from a bailout is for the European Central Bank, the ECB, to intervene on markets to buy Spanish bonds, something it can ill afford.

Nevertheless, Spanish ministers are no longer the only ones pressing the ECB to act. "If it becomes necessary to intervene again [to help Spain], it should be by increasing the so-called firewall protection, or through interventions of the Central Bank," French Foreign Minister Laurent Fabius told France 2 television on Tuesday.

The ECB is also seen as the only institution that can intervene with sufficient speed, if necessary, to help Italy, which is also facing market pressure.

The Central Bank bought more than 200 billion euros in government bonds to head off a similar bout of market panic over the EU's big southern economies last summer. The Frankfurt-based ECB later injected a trillion euros into the banking system. Those moves were widely praised for bringing the euro zone back from the brink of collapse.

However, the bank is reluctant to act again, not least because of fears of a public backlash in Germany, Austria, Finland and the Netherlands. Many of their residents don’t support what they see as mutualizing other countries’ debt problems and weakening their incentive to tighten belts.

The clash between opposing views in the north and south of Europe has been the root of the euro zone debt crisis since its earliest days in 2009 and the current debate shows Europe is still far from resolving it.

It looks like the recipe for another torrid summer on the European financial markets.

http://www.globalpost.com/dispatch/news/regions/europe/spain/120724/spain-germany-debt-euro-zone