Five Looming Dangers That Could Tear The Eurozone Apart
Sep. 29, 2012
Spanish prime minister Mariano Rajoy has battled for months to avoid the indignity of applying for a formal bailout from his European partners.
With Spain much closer to the single currency’s heart – both geographically and politically – than laggardly Greece, Rajoy has received plenty of support, including the promise of a €100bn injection of funds directly into the bombed-out banking sector. After Friday’s announcement of the results of an audit of the sector revealed a €60bn black hole, those funds will be essential.
But with borrowing costs for Spain climbing close to the 6% level that has repeatedly signalled danger throughout the crisis, most euro-watchers expect Rajoy to be forced to accept a package of aid, along with the strict list of terms and conditions that would imply.
Meanwhile, Moody’s is expected to deliver its verdict on Spain’s sovereign debt rating in the coming days, and a downgrade could just be the catalyst the markets need to drive up Madrid’s borrowing costs to dangerous levels.
Last week’s Spanish budget, which contained numerous new spending cuts and reform measures and won the approval of the European commission, was widely seen as a bid to pre-empt any extra austerity measures that Spain’s creditors might be likely to impose.
A bailout would allow European Central Bank president Mario Draghi to deploy his “outright monetary transactions” and make unlimited purchases of Spain’s bonds. But going cap in hand to the troika – the ECB, European commission and International Monetary Fund – would still be a deep political humiliation for Rajoy, at a time when Spain’s regional leaders are jockeying for independence and sky-high unemployment of more than 25% is imposing an excruciating cost on the population.