focus on Spain and Italy /N e...


The double downgrading of major Spanish banks and the country's creditworthiness by the rating agency Standard & Poor's has led the borrowing cost of Madrid's treasury to the prohibited area of 6.5%.
The yield of the ten year Spanish bond reached in the secondary market today Monday 28 May these unsustainable highs, returning to levels that forced the European Central Bank to intervene in the bebd markets towards the end of 2011.
At that time the ECB started buying Spanish debt paper to  refrain an uncontrollable hike of yields. Last Friday the fourth largest bank of Spain, Bankia, announced that it is expecting a €20 billion government injection of capital, a step that will raise the public participation in its equity from 45% to 90%.
It has yet to be decided if this support will come directly from the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM)  or it will pass through the country's treasury. In this last case the Spanish overall sovereign debt will further increase, exerting new pressures to the country's borrowing cost. Italy also suffered today a slight increase of its borrowing cost.
At this point it must be noted that Italy and Spain are borrowing from the capital markets, while the three programme countries, Greece, Portugal and Ireland are still  locked out and rely only on official loans from the rest of the Eurozone countries. It is interesting to observe that Spain and Italy while  paying dear for their borrowing at market interest rates now surpassing the 6% threshold, are at the same time obliged to lend to the three programme member states at officially regulated rates around 3%.
It is understandable then why markets are particularly sensitive to what happens in Spain and Italy, because those two countries are expected  to show the needed political willingness and social endurance so as to be able to sustain the crisis which hits their public finance and banking systems. If both of them succeed in implementing the structural and financial reforms needed to help them override the present state of crisis, then the entire Eurozone will soon be seen as leaving behind the core of the present crisis. It is not an exaggeration to say that Italy and Spain are now fighting for the entire Eurozone. The question is if they will be given the right support to overcome those problems.     

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