Strategic Briefing | 5.31.12 | Will Spain Leave The Euro?

Spain bank fears send bond yields to euro-era high
Associated Press | May 30
Investors worried about the viability of Spain’s banks sent the country’s borrowing costs into the danger zone Wednesday and pummeled European stocks, spooked about whether the Spanish government can pay for a bailout of a banking sector saddled with toxic loans and piles of foreclosed property born from a decade-long building frenzy.

Europe Fears Bailout of Spain Would Strain Its Resources
The New York Times | May 30
In the bond market, the Spanish government’s borrowing costs are approaching the symbolically dangerous level of 7 percent on 10-year bonds. The rise has stoked worries that Spain might need bailouts similar in scope — though many times larger — than those extended to Greece, Portugal and Ireland. Interest rates in that range had pushed them out of the debt markets that governments rely on to finance their operations.
Europe ponders ‘banking union’ to avert further euro crises
LA Times | May 31
If the Spanish government is left to bail out the nation’s banks, the government itself risks becoming insolvent. Its borrowing costs have risen to record highs on fears that Spain could be the next Eurozone member to need a bailout. Spain last week promised troubled lender Bankia nearly $24 billion to keep it afloat in a sea of defaults and foreclosures on properties now worth a fraction of the prices buyers paid.
Spain must tell Europe its plans for Bankia-EC
Reuters | May 31
Spain must lay out plans for nationalised lender Bankia to the European Commission (EC), a spokesman for the Commission said on Thursday, adding a domestic solution to the country’s bank crisis would be better than a European rescue. Spain’s centre-right government has so far failed to clearly say how it plans to finance a 23.5 billion euro ($29 billion) rescue of the country’s fourth-biggest lender, leaving markets confused and driving the country’s borrowing costs to levels at which Ireland and Portugal sought international bailouts.
Brussels throws gauntlet down to Berlin
Reuters | May 31
The European Commission leapt off the fence yesterday proposing many of the policies – a bank deposit guarantee fund, longer for Spain to make the cuts demanded of it and allowing the euro zone rescue fund to lend to banks direct (though there were some mixed messages on that) – that would buy a considerable period of time to move towards its ultimate goal: the sort of fiscal union that would make the euro zone a credible bloc much harder for the markets to attack.
6 reasons Spain will leave the euro first
Marketwatch | May 30
Spain is too big too rescue. When it comes to the crunch, the EU will always bail out the Greeks. Its economy is only worth 230 billion euros. It can be subsidized forever. If the Greeks vote for a government that rejects the bailout package, some more money can be thrown at them. Pumping 10% of gross domestic product into the economy only costs 23 billion euros — peanuts. That is not true of Spain. If the economy collapses, it can’t be rescued. It will have to do the hard work by itself.