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It wasn’t only Greece

The ECB’s restraint and the lack of clarity in economic policy keep market stresses high

The first test following upon the Greek elections has shown clearly that distrust of Spanish solvency did not proceed from Greece alone, but from the government’s handling of the banking crisis, its inability to transmit a clear plan for the economy and, of course, the absence of quick EU decisions to calm the stresses on the public coffers — Spanish sovereign debt now finds itself in an unsustainable situation, even in the short term. On Monday the risk premium rose as high as 589 points, and the differential for 10-year bonds, to 7.28 percent.

Much of the growing risk of insolvency in Spain and Italy is due to the absence of euro-zone institutions capable of coping with market pressures. Only a single euro-zone Treasury, a eurobond market and a program of fiscal harmonization, with a clearly defined time frame and program, can give credibility to a single currency that has yet to dispel the doubts about its break-up in the short term. But Germany is imposing severe austerity programs in the bailed-out countries, and similar measures in Spain. One of the major themes at Tuesday’s G20 meeting was set to be the possibility of flexibilizing EU austerity programs, so that they will not deepen the recession.

The lack of European mechanisms for action against the debt crisis makes the ECB’s role a decisive one. In the case of the June 9 Spanish bank bailout, a complementary move could well have been a central bank announcement that it would buy the necessary quantity of Spanish and Italian debt, with a further round of liquidity in the long term.

But the risk of bailout of the Spanish economy does not proceed only from the erratic behavior of Brussels, from the chancellor’s insistence on austerity at all cost and the ECB’s reluctance to dampen speculation in the markets. The Spanish government, adrift in generalizations about fiscal and banking union, and oblivious to the IMF’s urgings that it establish some sort of strategy besides budget cutbacks, has failed to dispel the doubts that weigh upon the financial system since the bailout. A week after the announced EU input of 100 billion euros to consolidate Spanish banks, we have no news on how this process will work. Will the banks pay, through the Deposit Guarantee Fund, the money injected into the nationalized banks, or will it be charged to the state debt? If so, what is the government’s plan to lighten this debt in years to come?

Who is at the wheel?

A similar silence surrounds decisive issues such as the IMF’s proposal to raise value-added tax, and to reduce administration costs. In formal terms, these are merely recommendations, but in fact they describe Spain’s only options if it is to meet this year’s deficit-reduction objectives. When Rajoy declines to make decisions, he is damaging his credibility concerning EU demands. The investors see that no one is steering a clear course and themselves give Spain a wide berth.

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