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Relentless market pressure

The markets distrust Portugal and Spain, despite their commitment to deficit reduction

Barely a few days of truce have been conceded by the public debt markets in the euro zone. The doubts about the Portuguese Treasury's capacity to cope with the renewal of maturing public debt in reasonable conditions, and the consultation begun by the European Commission about a new procedure for the handling of banking crises, may be the most immediate determining factors in the new tensions.

Little importance seems to be attached to the probable fulfillment of the deficit-reduction objectives lately undertaken by the Portuguese authorities. Nor does the European Commission's technical consultation, which may well portend a demand that private investors accept losses in banking crises, seem to constitute a reason sufficient to explain these upturns in interest rates for Portuguese government bonds.

What seems to weigh most heavily in the adverse expectations concerning the euro zone's peripheral economies is the vulnerability of their banking systems. This, of course, is the case of Spain. If Portugal eventually finds itself obliged to resort to the European rescue fund, the attention of the financial operators will be focused on the sustainability of Spanish debt.

The volume of Spanish public debt is in fact relatively small; however, it is the presumption that private debt will be difficult to service in the absence of economic growth that is the principal conditioning factor in these adverse expectations. The assumption of permeability between a succession of private insolvencies and a subsequent increase in public debt is not a mere hypothesis. It seems to be of little importance that the Spanish banking system as a whole possesses resources of its own superior to the European average. The manifest fears about its complete viability, and about the adequacy of certain operations now in progress for the integration of publicly administered regional savings banks into larger-scale entities, are a fact. This is why it is urgent that instead of issuing vague generic statements, the Bank of Spain should offer details concerning the high-risk-asset positions of the credit entities under its supervision. In those whose solvency is threatened, the central bank should impose strictly technical criteria.

The third major reason for which the public debt markets in the euro zone are still vulnerable, is the absence of a euro-zone-wide capacity for real coordinated management. Though necessary, it is not sufficient that the European Central Bank can intervene in the markets, purchasing bonds of the threatened countries. A transition in the direction of a real fiscal union throughout the euro zone would be the only way to assure the survival of the monetary union as we know it today.

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