The vicious euro circle keeps turning


It's no good bailing out the banks if you can't bail out the economy. That, in a nutshell, is the judgement that financial markets seem to have been making about Spain in the past few days.

For weeks, all we heard from financial analysts was that Spain's banks needed rescuing, and the Spanish government didn't have enough money to do it. Finally, this weekend, the prime minister swallowed his pride and asked for that support. But the market relief has been short-lived, even by the standards of past eurozone "bailouts".

At one point today the interest rate on a 10-year Spanish government bond had risen to 6.8% - the highest since the euro began. The gap between Spanish and German long-term borrowing rates also reached a record high, as did the cost of insuring against a Spanish sovereign default.

Why are investors still so gloomy about Spain?

One part of the explanation is probably our old friend, political uncertainty. The Greek election looms large on the horizon, and the agenda for the European summit at the end of next month looks painfully ambitious.

No-one knows, yet, what Chancellor Merkel will be willing to sign up to at that meeting - if, indeed, she is ready to sign up to anything at all. As Robert Peston has succinctly reminded us, she has good reason to be wary of the talk of a European "banking union" now coming out of Brussels. And so has the Bundesbank.

But the core of the problem for Spain - reflected very clearly in the market movements of the past few days - is economic growth. In Italy, too - worries about the state of the economy helped push up the Italian government's cost of borrowing at the start of the week.

It's largely the grim prospects for the Spanish economy that has led Fitch and other ratings agencies to downgrade so many Spanish banks in recent days. Emergency lending is helpful. But it can't make the recession go away, and it can't take away the need for many more years of fiscal austerity.

An extended period of economic depression and fiscal austerity can trash the balance sheet of the healthiest bank. As the IMF pointed out so helpfully in their recent assessment of Spain's financial sector, Spain does not have the healthiest banks. And, by raising Spain's national debt by up to 10 percentage points, the new 100bn-euro ($125bn; £80bn) European loan could actually make the clean-up job for the public finances last even longer.

We've seen, throughout this crisis, how different countries have been hit by the close, mutually destructive relationship between banks and their sovereign governments. In Spain, as in Ireland, it is the debts of the banks that have fundamentally weakened the government's balance sheet. In Greece, Portugal and to some extent Italy, the debt problems have largely spread in the other direction - from the government to the banks. Either way, it's been a toxic mix.

Now Spain's enfeebled banks are being made even weaker, by the broader economic consequences of tackling the government's debt problem - a problem created, in no small part, by the banks themselves. In that sense, the vicious circle is complete. And not just in Spain.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 263.

    262 There isn't time for that.Markets will decide when the time is up.Even if the MEPs and others running Euroland decided it was doomed it would take them years to agree to a plan.Instead, in the coming months or year or so the Euro may just fall off a cliff.If they don't have a plan already prepared in their back pocket (I don't think they have because they don't believe it) chaos will ensue.

  • rate this

    Comment number 262.

    A good idea for the next summit would be an announcement that the EU is beginning a multi year plan to dissolve the single currency, and give the markets some confidence that this absurd idea will end?

  • rate this

    Comment number 261.

    "The vicious euro circle keeps turning"

    It's not a euro circle, it's a euro garrote

  • rate this

    Comment number 260.

    256.John_from_Hendon; I did not impose the failed, flawed and disastrous single currency on any one.
    The inability now to deal with the deficiency of the euro is down to its architects, political dogma over ruled good practice......the euro by any shape of the imagination is finished.
    It is a failed, shambolic and retarded project......lets move on?

  • rate this

    Comment number 259.

    The only growth we will get is if we work our way out of it rather than speculate our way out. Confidence & growth is unlikey to happen quickly left in the hands of Eurozone leaders who created one currency for different mismatched economies that are now knitted together in the EU countries not just the Eurozone. Sterling is in the Eurozone we just call them pounds!!

  • rate this

    Comment number 258.

    257.You ; Hate people? I have 5 children from a Danish woman, friends all over the world and love social intercourse.
    It your sad obsession with the rapidly declining EU project which blinkers your common sense .....You are in a minority my poor misguided friend.

  • rate this

    Comment number 257.

    255.John_from_Hendon; You have bound books? You are a self centered. egotistical selfish doubt your pension is paid in euro's.
    You speak of hatred .... you are the one who spouses such vile and disgusting statements to anyone who dares to disagree with your inane ramblings...
    I hate no person......only autocratic rule EU.
    Fate? Greece, Spain, Ireland, Portugal.....

  • rate this

    Comment number 256.


    We have both been working in Europe (and in my case all round the World) from in my case the early seventies.

    The difference between is I am an optimist and like people and you are a pessimist and hate people.

    Why do you hate others so much that you don't care about their fate?

    Why do you have no understanding of enlightened self interest for your customers/suppliers?.

  • rate this

    Comment number 255.

    249. WolfiePeters

    Get hold of the Bank of England's change over plans that were published some time ago. I have the bound books, but I think they should be available on-line of direct from the HM Treasury or the Bank of England (where mine came from.)

    Search for "Euro Preparations" in the archive of HM Treasury

  • rate this

    Comment number 254.

    248.John_from_Hendon ; My perceptions come from a 40year experience working in Europe...yours from your own admission come from "decades of international multi-currency business management experience"
    You simply cannot accept a different view point.
    YOU ARE A BANKER or some part of that disgusting BREED
    You are simply imbecilic in your perceptions my blind friend.
    Your EU dream is over, accept it

  • rate this

    Comment number 253.

    The EU project born of the admirable desire to avoid another European War seems to have totally lost the plot, the total mistrust of the democracy has become the dominant characteristic.

    The facts of the EZ position have become almost irrelevant--it's like a medieval Religious War, you're either with the faith or against it, and facts are useful only as tokens of belief.

  • rate this

    Comment number 252.

    jfh 246

    How long did the changeover to the euro take and how much did it cost.

    By the looks of it we are in for decades of negative growth in any case.

    We criticise Spain for its housing bubble. Wait until ours bursts, or if it does not, it will take a generation of stagnation at best to outgrow it.

    I am not so sure that giving up our only chance of survival (currency control) is a good idea

  • rate this

    Comment number 251.

    Who will the cracking economies blame for this long painful situation. UK will blame the Eurozone & BOE policy of Euro tracking & negativity, Germany blames everyone else, France probably the UK & so on. 4 years ago we were told its bad UK housing loans then US bad housing loans. Now we blame politicians/financial institution. for speculation & manipulation & failure to sort out the mess created.

  • rate this

    Comment number 250.


    Your hatred of other is totally apparent in all of your posts.

    Why do you want to do harm to others?

    What is it with you that you are totally blind to the consequences of your actions. Your kind of ill through through ideas are very very damaging. You want glib easy answers. When you grown up (if you ever manage it) you will learn that life is not like that!

  • rate this

    Comment number 249.

    244 John_from_Hendon

    If I have no understanding of the practicalities, please explain or point me to a source of information (since you refer me also to your 243, preferably one suitable for an ignorant driveller etc.).

    Were you involved in or have close experience of the previous change over in the EuroZone?

  • rate this

    Comment number 248.

    245. sjov

    No, you are short sighted and unable to see the wood for the trees. Your myopia is the same type of unenlightened self-interest that has created appalling consequences in Europe. You need to get out more and speak and listen to older people with some experience of life and the real consequence of beggar my neighbour economics and politics.

    You are juvenile in your perceptions.

  • rate this

    Comment number 247.

    244.John_from_Hendon ;241. WolfiePeters,240. awhitecat

    John, you have absolutely no understanding of anything other than your own warped ideals. Anyone who you disagree with is insane, stupid etc

    LOOK IN THE MIRROR my friend is you who is the problem not the majority you try to bully with your nastiness.Your arrogance is identical to that of your mentor Barmy Barroso.

  • rate this

    Comment number 246.

    231.zipperty "We traded successfully without the Euro. Why not again?"

    How many extra decades of -ve growth are you prepared to unnecessarily inflict on the UK and Europe)?

    That is the question you need to answer.

    I have many decades of international multi-currency business management experience and have been involved in changeovers and they cost huge sums of money and take a long time.

  • rate this

    Comment number 245.

    243.John_from_Hendon ; What exactly was the argument? Aaaa yes anyone who disagrees with your opinion is stupid.
    I LIVE & WORK in EUROPE ..I speak daily with Danes, Swedes , Belgians, Germans et al who are tired of the the shambolic, autocratic EU which you intend to assert on Europe's populous.
    My 'hatred' as you say is of the EU...
    Your hatred is of DEMOCRACY
    Frankly I think you are deranged!

  • rate this

    Comment number 244.

    241. WolfiePeters

    You have next to no understanding of the practicalities of changing currencies.

    also see 243.

    240. awhitecat

    You inane misguided belief in referendums would be quaint and charming if it were not so damaging. Referenda do not produce the answer to the question asked. They are always about wider issues and almost never about the actual question on the ballot paper.


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