The euro crisis is escalating at a faster pace than expected since the EU leaders “grand plan” to break the link between sovereigns and banks was exposed as a plan for the future and not now, at the height of the storm.
Germany, Luxembourg, and the Netherlands got a rude reminder that even though their finances are in relatively good shape, being part of the euro makes them vulnerable. Moody’s put them on “negative” outlook because of the cost of a possible Greek euro exit and the potential cost of rescuing Spain.
Business confidence in France fell to the lowest in over two and a half years adding to signs of slowdown in the eurozone’s second largest economy.
Economist Lena Komileva told the BBC: “Italy is of course an open target for contagion [from Spain], but I’m increasingly concerned about the position of France.”
Goldman Sachs chair Jim O’Neill stressed the need for decisive action. “If Italy gets into the kind of pressure that we now see on Spain, there would be contagion into the French markets probably,” he said.
While Greece is seen as the tinder-box, it has been put to one side for the moment as troika officials began work in Athens yesterday to see how much money and time they will need. They are not expected to report back until September, while European Commission president Jose Manuel Barroso is flying to Athens to meet prime minister Antonis Samaras.
But Spain has become the focal point as a growing number of its autonomous regions reveal gaping holes in their accounts. It has also exposed the deadly loop with the banks as, over the past few months, they have cut credit to the regional governments as pressure increased on them to shore up their own structures, and the central government announced a special liquidity fund.
Now, with the full extent of the regional governments debts known, the drag on Madrid has increased massively, with six of the 17 expected to need help. Catalonia, the biggest, is to join Valencia in requesting aid from the €18bn central government liquidity fund.
Analysts warn the situation can only get worse as markets push up the country’s borrowing costs to unsustainable levels even before the full details of its banking needs are known in September.
Spanish finance minister Luis de Guindos was in Berlin yesterday evening to meet his German counterpart, Wolfgang Schaeuble. Having to pay the second highest for short-term debt — even though they raised slightly more than requested — is seen as pushing Spain ever closer to a full bailout. Five-year borrowing costs are now more costly than 10-year costs.
Italy, whose banks are in a much more healthy state but whose debt levels are higher, is suffering too and yesterday it was being quoted higher costs than Ireland.
But just where money to bail out Spain, the eurozone’s fourth largest member, would come from was not clear. The €100bn pledged to Spanish banks depletes by close to half the EFSF and the new fund, the ESM, will be delayed until at least mid-September.
France joined Italy and Spain in looking to the ECB for a solution by buying bonds, a move it has been reluctant to make since it stopped its Securities Markets Programme in February. ECB president Mario Draghi said at the weekend that they “had no taboos” about doing so.
They may consider it at their next policy meeting next week, Aug 2, but it is understood they would need encouragement, especially from Germany, to do so.
The IMF has been pushing for a bigger, more inclusive reaction by the eurozone to put out the fires of the euro crisis for some time, and was positively vitriolic in its criticism in their eurozone report last week about failure to act.
French foreign minister Laurent Fabius told France 2 Television that he hoped it would not be necessary for the ECB or the eurozone to intervene again.