Focus on Eurozone: The Blame in Spain…

Posted May 31, 2012 by Editor

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• More reassuring news from Greece has been overwhelmed by the bad news from Spain, accentuating the contagion risks as investors flee to “safe” assets.
• While Spain has been “doing their homework” regarding economic reforms and controlling government spending, the banking situation is a mess.  The clear impression is that Spain is refusing the possibility of getting EU bail out funds to help recapitalize its banks (where around € 100 bln may be needed) for fear of the marked domestic political damage to the ruling Popular Party that the attendant loss of economic sovereignty would bring in its wake.
• Eurozone leaders are still too preoccupied with domestic agendas.  All countries agree that marked economic pain lies ahead but few are prepared to accept any sharing out of that pain.
• The question now is whether there is someone (perhaps the ECB) who can overcome German resistance to allow the ESM to bail-out banks directly as this may be the only way to break the reinforcing and adverse link between banks and sovereigns.

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