From Greece to Spain To Italy ... and back again. The euro zone domino effect takes another spin.
By Jan Hildebrand
BERLIN - That little group of European problem countries is growing again: Spain and Italy are once more on investor radars, alongside Greece. On Monday, yields for the government bonds of both countries rose markedly. While the interest rate for German bonds -- considered a safe investment option -- was a puny 1.37%, for Spanish bonds it was 6.41%: the highest it's been since the euro was introduced.
The reason for investor doubts is the escalating bank crisis. Spanish financial institution Bankia, which is partially state-owned, asked Madrid for help, saying it needs a further 19 billion euros in bailout cash. That is substantially more than had been feared, making it clear that Spain must undertake drastic austerity measures in order to get a handle on its deficit.
And now Bankia has increased the government's burden. Spanish Prime Minister Mariano Rajoy, however, denied speculation that he planned to use the euro bailout fund to help the bank. "Spanish banks will not receive any European bailout money," he stated.
Rules from the euro zone bailout mechanism EFSF prohibit the direct support of banks: monies must flow to the country concerned after they have applied for help. Recently, however, there have been appeals from various quarters such as the International Monetary Fund (IMF) to soften rules and make it possible for bailout funds to be paid directly to banks. The German government is opposed to this.
Rajoy does not in any case see the Bankia problem as the cause for the latest financial market turbulence; he blames Greece. "Everybody knows that Spain is doing everything to reduce its deficit," he said. "But there is general uncertainty about the situation in Greece." The possible Greek bankruptcy and departure from the euro zone indeed could be the biggest danger to Spain.
The same holds true for Italy. The third largest economy in the currency union is also under pressure. On Monday, Italy did succeed in raising 4.25 billion euros on the capital market, but interest rates were higher than they had been at previous auctions. Investors wanted 4.04% on two-year bonds which is 0.7% higher than a month ago. By way of comparison: Germany was just able to get money over a two-year period practically for free.
When elections drive economics
This situation is a clear indication that the euro crisis, following a short respite, has hit the financial markets again with a vengeance. Yields for Spain and Italy still haven't hit last fall's record highs -- when the countries had to pay 6.7% and 7.2% respectively and further escalation was only prevented by the intervention of the European Central Bank (ECB) -- but the trend is clear: investors are getting increasingly edgy.
The mood follows on the election results in Greece, with the left-wing coalition Syriza now second strongest, and its leader Alexis Tsipras refuting the reform programs that had been agreed on with the EU and the IMF. The Europeans have made it clear that there won't be any more aid payments if Athens doesn't stick to the terms of the agreements. Should Tsipras win the June 17 elections, it could lead to the country's bankruptcy and departure from the euro zone. That anyway is the message many European capitals are sending.
The warning might be bearing fruit: according to the most recent polls results, the conservative Nea Demokratia party together with the socialist Pasok just might constitute a majority this time, and both say they intend to stick to the austerity course. The Athens stock exchange reacted positively to the news and the prices of stocks -- particularly Greek bank stocks -- rose.
Meanwhile, German business groups criticized German politicians for bringing up a possible return of Greece to the drachma – it only fuels the mood of uncertainty, according to Martin Wansleben, who heads the Association of German Chambers of Industry and Commerce (DIHK). "Nobody in Europe would benefit from Greece leaving the euro zone," he said.
Hans-Peter Keitel, the president of the BDI Federation of German Industry, warned that Greece leaving the euro zone "would be an experiment with an uncertain outcome. Nobody really has a handle on what the risks would be." For his part, the departing head of the European Aeronautic Defense and Space Company EADS, Louis Gallois, told Die Welt: "There is a risk that Greece will leave the euro zone. That could lead to a domino effect and take other countries along with it."
Meanwhile, travel giant TUI has been advising tourists going to Greece to take a lot of cash with them so that they will not run into difficulties should there be a run on the banks there.
Read the original article in German
Photo - gaelx