The eurozone crisis refuses to abate: this morning, the yield on Spanish ten-year securities soared over the 7.1% threshold, signifying renewed fears in the sovereign debt market over the country’s stability.
The latest increase in Spain’s borrowing costs had seemed inevitable since Friday, at which point Madrid’s bond yields were hovering around the 7% mark. At this rate, Spain will be unable to operate much longer without a full EU bailout, as opposed to the relatively modest €100bn rescue package recently agreed for the purpose of recapitalising the nation’s failing banks.
Yet it was little over a week ago that an unusually successful Brussels summit saw both Spain and Italy secure advantageous terms from Germany on bank recapitalisation and fiscal oversight, with the aim of driving down each country’s increasingly unaffordable borrowing costs.
So what’s gone wrong?
As the Financial Times wrote on Friday:
“The proposals initially helped to lift markets and push down the cost of borrowing for Spain, Italy and other so-called peripheral countries.
“However, as hopes have faded about the economy and fears emerged about the details of the EU proposals and how quickly they can be implemented, yields on peripheral debt have risen.”
The Guardian reports:
“While the Germans and other north Europeans insist that direct bank injections can only be contemplated once a new regime of eurozone banking supervision is in place (likely to take a year). Senior Eurogroup officials signalled that even in the event of bailout funds going straight to banks, the host country would still be burdened.”
According to MarketWatch, Eurogroup finance ministers are due to meet in Brussels later today to clarify these issues among themselves. Yet, in reality, the position has already been made quite clear by Angela Merkel’s coalition partners.
Since the June 28th summit, Angela Merkel has come under pressure from her own Christian Democrats’ Bavarian sister party, the Christian Social Union, whose leader, Horst Seehofer, has warned that any dilution of Germany’s hardline position on the need for fiscal discipline could see his party withdraw from government.
“Without the CSU”, Seehofer publicly reminded Merkel, “the coalition has no majority”:
“Ms Merkel has contested these “misunderstandings” and pledged “strict conditions” for any future capital injections for eurozone banks and sovereign bond purchases by the eurozone rescue fund. But her words to the German parliament late on Friday apparently failed to soothe Mr Seehofer, also state premier of Bavaria.
He told Stern magazine in an interview that it was hard for voters to understand how Ms Merkel could have asked the Bundestag to approve the new European Stability Mechanism on Friday while “at exactly that moment leaders of some euro governments were working towards weakening its very own stability criteria”.
Giving notice that the CSU, long critical of eurozone bailouts, would scrutinise the final details of last week’s deals, Mr Seehofer said: “We trust the words of the chancellor: even in future there won’t be any aid without strict conditions and reform requirements“.”
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So there you have it. European finance deals don’t work without Germany, and – for all that Merkel had appeared to soften her position – the German government is now held together by austerity blackmail. The eurozone crisis is rapidly heading back to square one.