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Markets call eurozone's bluff on Spain Markets call eurozone's bluff on Spain
(about 21 hours later)
Can the euro crisis be contained until the euro leaders summit in Brussels on 28-29 June? On current form, it'll be a close-run thing.Can the euro crisis be contained until the euro leaders summit in Brussels on 28-29 June? On current form, it'll be a close-run thing.
The Greek relief rally lasted an hour on Monday. Worse, Spain's borrowing costs hit another euro-era high – the yield on 10-year bonds reached 7.2%. The Spanish banking bailout, announced amid triumphalism in Madrid only nine days ago, seems like another age.The Greek relief rally lasted an hour on Monday. Worse, Spain's borrowing costs hit another euro-era high – the yield on 10-year bonds reached 7.2%. The Spanish banking bailout, announced amid triumphalism in Madrid only nine days ago, seems like another age.
There were at least three problems with it. First, it destroyed the notion that Spain's saving grace was its relatively low debt-to-GDP ratio: the €100bn, or whatever the final figure turns out to be, goes directly onto the government's books since the bailout is not, as Rajoy had wished, a direct injection of funds into the Spanish banking system. Second, investors in Spanish bonds feared being relegated down the pecking order of creditors if the loans directed via Madrid to the banks carry preferred status. Third, investors made the straightforward calculation that a country that cannot raise money at attractive rates to fund its banks cannot raise affordable capital full stop.There were at least three problems with it. First, it destroyed the notion that Spain's saving grace was its relatively low debt-to-GDP ratio: the €100bn, or whatever the final figure turns out to be, goes directly onto the government's books since the bailout is not, as Rajoy had wished, a direct injection of funds into the Spanish banking system. Second, investors in Spanish bonds feared being relegated down the pecking order of creditors if the loans directed via Madrid to the banks carry preferred status. Third, investors made the straightforward calculation that a country that cannot raise money at attractive rates to fund its banks cannot raise affordable capital full stop.
At 7.2%, the cat is out of the bag. Spain can tolerate such rates for a while (there will be an auction of short-dated debt on Tuesday and another later in the week) but the only sure-fire remedy is a direct sovereign bailout. That's the reality the eurozone leaders may have to confront in Brussels at the end of this month.At 7.2%, the cat is out of the bag. Spain can tolerate such rates for a while (there will be an auction of short-dated debt on Tuesday and another later in the week) but the only sure-fire remedy is a direct sovereign bailout. That's the reality the eurozone leaders may have to confront in Brussels at the end of this month.
To take Spain out of the bond market for three years might cost €400m or so (since there's about €200bn of debt that matures in that period), which is roughly the level of eurozone members' commitments to the European Stability Mechanism. But there's a world of difference between a commitment to write a cheque and the act of writing it. Indeed, deploying the ESM would almost exhaust the fund that was meant to stand as a deterrent against market attacks. In other words, the markets are calling the politicians' bluff. Spain, not Greece, is the trigger for the crisis to be solved – or not. To take Spain out of the bond market for three years might cost €400bn or so (since there's about €200bn of debt that matures in that period), which is roughly the level of eurozone members' commitments to the European Stability Mechanism. But there's a world of difference between a commitment to write a cheque and the act of writing it. Indeed, deploying the ESM would almost exhaust the fund that was meant to stand as a deterrent against market attacks. In other words, the markets are calling the politicians' bluff. Spain, not Greece, is the trigger for the crisis to be solved – or not.
• This article was amended on 19 June