How Long Can Europe keep Playing Pass The Bomb?
Spain has today finally swallowed its pride and turned to European institutions for a $125 billion bailout of its banking system. We all know this has been on the horizon for some time but things have finally reached a pinnacle this week as Spain has seen its 10 year bond yields soar nearer to the critical 7% level! Spain has been struggling to cope with its sovereign debt levels in their current state and has finally acknoledged that adding the cost of a bank bailout to this debt will make it unsustainable!
With Spain now becoming the largest euro area economy to seek a bailout, how long can Europe continue to play pass the debt bomb before it blows?
Last week we had market fears over Ireland’s vote on the EU Treaty, this week it’s Spains banking system and if European leaders can manage to paper over the Spanish cracks, next week tensions will again be raised over Greece’s second round of elections this year!
The Spanish bailout is for now being played out as a bank recapitalization. This explains the relatively small bailout figure of $125 billion dollars. Really though this is just the tip of the Iceberg of what Spain will actually need if Europe is going to succeed in halting this problem on the Spanish borders! The problem Spain now has is that its initial denial of the need for a bailout of its banking system will cause financial markets not to trust any future assurances that it will not need further bailouts. This will, as it did in Greece, cause the problem to intensify on its sovereign debt borrowing rates and make a further much larger bailout inevitable in the not so distant future.
The two economies that if they were to need a bailout were supposed to signal the beginning of the end for the Euro were Spain & Italy. These economies are widely considered far too big to bailout. Now that one of them has finally cracked how long will it be until Italy is on the markets radar again? And with the Greek elections on June 17th again threatening market stability, could this Euro debacle finally be coming to a conclusion?
Is the Euro debt bomb about to go off?