Spain and Greece back in focus as bond yields rise after protests

Markets were looking decidedly shaky yesterday after fears about the European debt situation resurfaced, yet again!

The political situation in both Greece and Spain seems to be increasingly concerning. Spanish Prime Minister Mariano Rajoy is continuing to avoid asking for a European Central Bank (ECB) bail out because of fears of another slump in voter support and also worries about a separatist movement in Catalonia who are calling for a referendum to leave the country. 

Thousands of protesters marched to Spain’s parliament yesterday, demanding an end to further austerity measures. The country’s borrowing costs for 10-year bonds rose once more over the key 6% level too as a consequence of Rajoy’s continuing to reject ECB intervention and so the markets are looking to force his hand it seems

A general strike in Greece also highlighted the need for the EU/IMF to give the country some breathing space in implementing yet more austerity measures in the face of a collapsing economy. 50,000 strikers attended a rally in Athens yesterday. With GDP falling 6.2% in the second quarter of 2012 and almost one in 4 out of work things are dismal. Greek Prime Minister, Antonis Samaras, is stuck in the middle between ensuring that the latest tranche of bail out money is released to keep the country afloat and driving voters into the hands of hardline parties. At its worst, the country could fall into total anarchy with the consequent collapse in living standards. 

Mario Draghi’s plan for the ECB to buy unlimited amounts of short-term government debt seemed to be the antidote needed to stabilize the European debt situation. But for a country to accept aid, it has to accept additional financial oversight and this is an uncomfortable problem for a country like Spain. Although the ECB may be bending over backwards to solve Spain’s property bubble induced problems, Draghi can’t force Rajoy to take it.

The ECB may be powerless in the face of political will in struggling countries unless it austerity approach wilts and unfortunately, German pressure is unlikely to relent in this respect. A blank cheque for Spain and others is not something that Angela Merkel will sanction right now. At the moment it’s a game of chicken between the markets who drive bond yields to unsustainable levels, the Eurozone acts, then partially retreats and the cycle starts again. The rich countries of Northern Europe are at odds against those in the South and the underlying structural fragility of the euro is at the heart of the issue.

One to keep an eye on!

Contrarian Investor UK