25 Jul 2012
- This week Spanish borrowing costs have reached new euro-era highs of over 7.5%. These costs are starting to look ruinous for an economy already struggling to emerge from a steep public deficit and sharp economic contraction. Madrid is painfully close to being priced out of debt markets altogether. Although it can bear this expense for a while, it could quickly become self-defeating.
- Mariano Rajoy’s Partido Popular government has played a comparatively strong hand with a surprising lack of confidence, but it has also been hobbled by a massive banking crisis and collapsing growth.
- The stark reality is that the only answer for Madrid is for yields to fall back relatively quickly to sustainable levels more like the 5% of early 2012 and to stay there. If this sounds unlikely, then the only conclus ion can be that a Spanish bailout is probably just a question of time.
- If the contagion effect from a Spanish bailout was to force the same course on Italy, which is probable , then the resources of the current Eurozone bailout funds would be insufficient. A Spanish bailout, even if it did not trigger a crisis in Italian sovereign debtmarkets,would push the Eurozone into a new and critical phase.
The views expressed in this note can be attributed to the named author(s) only.