After the Sovereign Debt Crisis Comes the Deleveraging

Wednesday, June 27, 2012
By Paul Martin

by EconMatters

Spain formally became the fourth country to ask for bailout aid from the euro zone on Monday, June 25. Spain’s short-term borrowing costs nearly tripled at auction on Tuesday. Market participants expect Moody’s to further downgrade Spain’s sovereign debt to Junk status.

Meanwhile, Cyprus also beat Italy to officially become the fifth Euro Zone bailout nation as ‘‘negative spillover effects through its financial sector, due to its large exposure in the Greek economy,’’ according to a government statement.

Although no specific amounts were determined yet, WSJ reported that two external consultancies estimate Spanish banks’ actual capital needs could be at around €62 billion ($77.5 billion), and Cypriot Finance Ministry staff said they expect the total financing needs to come to €10 billion ($12.5 billion).

Between the two, Spain is the one causing a lot higher anxiety. Spain is Europe’s fourth largest economy, which is larger than the other four euro bailout sisters—Greece, Ireland, Portugal and Cyprus–combined. And remember Spain already requested up to €100 billion ($125.7 billion) from EU bailout earlier this month to recapitalize its regional banks reeling from the collapse of its massive real estate bubble. Sadly, judging from the current debt situation (see graph below), the Euro bailout train most likely will not stop here.

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