Spain and Italy Cause Widespread Panic in the Markets

The stifling effects of the Spanish government’s austerity measures have prompted panic selling of Spanish debt, with skeptics questioning whether Spain will be able to avoid a further bailout, even with a whopping 27bn Euros of tax and cuts. Many believe those measures are actually making things worse, hampering the country’s ability to pull itself out of the mess. And just to think Italy waits in line, Portugal is coming around for thirds and perhaps Greece will be back in line soon.

It’s certainly not looking good. Spain’s Prime Minister, Rajoy has warned there’s no alternative to austerity – this when unemployment’s already up to 23% overall, rising to 50% amongst young people. Meanwhile central bank governor stoked the panic further, saying the banks will need a new bailout. Interest rates on 10-year Spanish bonds hit 6% for the first time since January, while stocks fell to a three-year low. 

You can’t really blame investors for any nervousness. Greece is one thing, but when you’re dealing with a crisis in the eurozone’s fourth-biggest economy it’s definitely panic time.

Last year, Spain missed its deficit target of 6%, instead managing only 8.5%. The Eurozone wants that to be cut to 5.3% this year, and 3% in 2013, an impossible task according to Spanish economists. Trying to do this while the economy is slated to shrink by 1.7% this year, and that’s before you factor in the adjustment of more than 60bn euro over the next two years.

At least the world’s financial leaders will have plenty to talk about when they convene in Washington for next week’s bi-annual meeting of the IMF

There’s also the small matter of Italy, where the coalition government is facing growing hostility to reforms of its labor market and the scale of its public debt. The government’s rumored to be preparing to downgrade its growth forecasts too.

Meanwhile Greece will be also back in the picture again soon. Not only are it’s shipping workers on strike, but its government is holding a general election on 6 May. We suspect austerity may well be on the agenda there too. And will the new government continue to answer to the EU and IMF.

The effect of all this uncertainty has been widespread: stock markets plunged around Europe, signaling the end of a period of calm bought with €1tn of cheap loans to banks from the European Central Bank in recent months.

Meanwhile Wall Street has now suffered five consecutive days of decline. The euro is falling against the dollar and yen.

Things have calmed since the initial panic, but the overall picture would look less bleak if it seemed like anyone had a convincing answer. The European Central Bank’s emergency measures, including its ominous-sounding ‘repo’ operation offering cheap money to troubled banks, certainly hasn’t done the job in Greece as it was hoped.

So the ECB will be forced to come up with something pretty spectacular in the next few weeks to prevent this escalating. IMF head Christine Lagarde is likely to use the renewed crisis in the eurozone zone to seek support for an increase in the fund’s resources. 

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