Ireland and Greek’s financial problems were pitchforked into the headlines but there are fears that another key European country could also be enmeshed in Europe’s escalating debt crisis: Spain. And although Spanish officials are pooh-poohing the idea of a bailout the situation in Spain — and elsewhere in Europe — is trending in one way: grim.
The debt crisis in Europe escalated sharply Friday as investors dumped Spanish and Portuguese bonds in panicked selling, substantially heightening the prospect that one or both countries may need to join troubled Ireland and Greece in soliciting international bailouts.
The draining confidence in Western Europe’s weakest economies threatened to upend bond markets, destabilize the euro and drag out the global economic recovery if it is not quickly contained. It also underscored the mounting problems facing countries that during the past decade have both over-borrowed and overspent, and are now in danger of losing investor faith in their ability to make good on their massive piles of debt.
So Europe also had its Black Friday — but with a more grim meaning:
The perceived risk of debt defaults in Portugal and Spain drove their borrowing costs to near-record highs Friday, with the interest rate demanded on Portuguese bonds at a point where it could effectively cut the Lisbon government off from raising fresh cash to run the country.
As a result, Portugal was coming under pressure to immediately request a bailout from the European Union and International Monetary Fund. Officials in Lisbon responded by pushing through a painful round of budget cuts meant to reassure investors and rejected claims that they needed an emergency lifeline. Italian and Belgian borrowing costs also rose Friday.
The bigger fears, however, surrounded eroding confidence in Spain, whose faltering economy is more than twice the size of the Greek, Irish and Portuguese economies combined – meaning that a bailout there could run into the hundreds of billions of dollars.
Coupled with the pending bailout for Ireland and possibly Portugal, analysts said, a Spanish rescue could severely deplete the $1 trillion stability fund set up by the E.U. and IMF this year to contain the crisis. That could complicate the E.U.’s ability to mount a defense if another member nation were to need assistance.
Spanish officials are insisting that no matter how bad it looks, they don’t plan to opt for a bailout:
Spanish officials Friday adamantly denied the country needed external support, but said they would reduce upcoming debt sales as the country’s financing costs skyrocket in the wake of Ireland’s financial meltdown.
In a radio interview, Prime Minister Jose Luis Rodriguez Zapatero said Friday there is “absolutely” no chance Spain will seek a bailout from the European Union and issued a challenge to traders who bet against his country, saying: “Let me warn those who are shorting Spain that they’re mistaken, and will act against their best interests.”
Finance Minister Elena Salgado acknowledged that Spain has had to pay high interest rates at recent debt auctions but said the average interest cost of outstanding debt remains near historic lows. She also said the govnerment’s better-than-expected budgetary performance means its financing requirements are covered for the rest of the year.
“We’re not going to cancel any auctions this year,” Salgado said. “But since we are well-cushioned, we are able to reduce the size of the planned issues.”
Both Zapatero and Salgado said the country’s recession has bottomed out, the reduction of the government’s budget deficit from 11.1% of gross domestic product last year to a planned 9.3% this year is on track and that the country has taken great strides in restructuring its ailing sector of mutually owned savings banks. Salgado said the number of these institutions had been reduced to 17 from 45….
These comments came amid signs that a Spanish bailout, a remote possibility only days ago, is becoming a more pressing issue for the country’s authorities along with the possible need for more fiscal austerity measures.
In unusually candid comments, Jose Luis Malo de Molina, the Bank of Spain’s chief economist, said Thursday that Spain’s reliance on external financing makes it particularly vulnerable to the spread of the sovereign debt crisis.
Striking workers shut down much of Portugal, Ireland proposed its deepest budget cuts in history and Italian and British students clashed with police over education cuts.
Analysts warned that even the desperate efforts of governments, the EU and the International Monetary Fund might not be enough to prevent countries defaulting or banks going under.
The Irish Stock Exchange saw a bloodbath in bank stocks as investors pushed the panic button, and bond traders were betting it would be only a matter of time before Portugal and possibly Spain begged for outside help. In the Portuguese capital, strikers all but closed Lisbon airport.
“People have to fight for their rights,” said commuter Luis Moreira, 51, referring to salary and pension cuts.
Government policies had “sent people into poverty and misery”, said union leader Manuel Carvalho da Silva, noting that Portuguese civil servants would see average wage cuts of 5 per cent next year.
In Italy, students occupied university buildings and piazzas to denounce proposed education cuts, clashing briefly with police in Rome and blocking five main bridges over the River Arno in Pisa.
In Britain, students decried government plans to triple tuition fees. “Education is not a rich kid’s game,” said Tash Holway, a 19-year-old student in London.
“If this keeps up, the entire industry will change. It won’t be about talent, but only about who can pay.”
Another week, another crisis for the euro. In April, the single currency wobbled as Greece was rescued. This week and last, Ireland sparked the panic. Next week, if the markets are to be believed, it’ll be Portugal. Then Belgium. And, finally and fatally, Spain. On current trends, the euro is in for another roller-coaster month before it splinters, having crashed into the safety barrier.
If such a scenario was being sketched by the euro’s detractors, it would be one thing. But, it’s the euro’s own members who are warning of the perils ahead. “The risk of a eurozone break-up is very real,” Ivan Miklos, finance minister of the area’s newest member Slovakia, said this week.
Luis Amado, Portugal’s foreign minister, aired similar views recently. He warned: “The alternative to the situation we confront is eventually leaving the euro. That is a situation that could inevitably be forced on us by markets to consider.”
“We are in a survival crisis,” European Union president Herman Van Rompuy noted last week. Even Angela Merkel, the German Chancellor, has admitted that the eurozone is “facing an exceptionally serious situation”, with her finance minister Wolfgang Schäuble adding: “Our joint currency is at stake.”
Such remarkable language demonstrates just how precarious the European project now is, as the huge build-up of debt in the past decade comes home to roost. Greece, Belgium and Portugal have worryingly high public sector borrowing. Ireland, and to a degree Spain, have dangerously large exposures to toxic bank loans. All have budget deficits that are multiples of the 3pc eurozone limit. The spectre of a debt trap for them all looms large.
Joe Gandelman is a former fulltime journalist who freelanced in India, Spain, Bangladesh and Cypress writing for publications such as the Christian Science Monitor and Newsweek. He also did radio reports from Madrid for NPR’s All Things Considered. He has worked on two U.S. newspapers and quit the news biz in 1990 to go into entertainment. He also has written for The Week and several online publications, did a column for Cagle Cartoons Syndicate and has appeared on CNN.