Tuesday, June 12, 2012
The vicious euro circle keeps turning
June 12, 2012
It's no good bailing out the banks if you can't bail out the economy. That, in a nutshell, is the judgement that financial markets seem to have been making about Spain in the past few days.
For weeks, all we heard from financial analysts was that Spain's banks needed rescuing, and the Spanish government didn't have enough money to do it. Finally, this weekend, the prime minister swallowed his pride and asked for that support. But the market relief has been short-lived, even by the standards of past eurozone "bailouts".
At one point today the interest rate on a 10-year Spanish government bond had risen to 6.8% - the highest since the euro began. The gap between Spanish and German long-term borrowing rates also reached a record high, as did the cost of insuring against a Spanish sovereign default.
Why are investors still so gloomy about Spain?
One part of the explanation is probably our old friend, political uncertainty. The Greek election looms large on the horizon, and the agenda for the European summit at the end of next month looks painfully ambitious.