Spanish Bailout Could Be Too Much for Euro

Nation's collapse represents 'systemic risk' for EU

By Nick McMaster,  Newser Staff

Posted Nov 25, 2010 5:01 PM CST

(Newser) – The eurozone has bailed out troubled member states with success thus far, but Europe now faces a graver economic threat then ever before: the possibility of a major economic collapse in Spain. The busts in Greece and Ireland (and now possibly Portugal) have all been manageable because the economies in question are relatively small. But Spain's is twice the size of all three combined, the New York Times reports.

Investors are unsatisfied with the proposed austerity plans and bailouts-in-waiting, and their worries are showing elsewhere: the yield spread between Spanish bonds and those of Germany is higher than it has been since the euro was introduced. Spanish officials continue to maintain that the country can weather the economic storm, pointing to stress tests of the nation's banks that found only 5 institutions to be at-risk. Yet the results of such tests have been weakened by the developments in Ireland, whose banking system also ended up being frailer than anticipated—and could become even less credible depending on what happens in Portugal: Spain is that country's biggest trade partner and creditor. "Spain’s banks already have enough problems, but the exposure to Portugal could just turn into the wild cart which upturns the whole apple cart," said one economist.

A broker works at the Stock Exchange in Madrid Thursday Nov. 25, 2010.
A broker works at the Stock Exchange in Madrid Thursday Nov. 25, 2010.   (AP Photo/Daniel Ochoa de Olza)
Brokers look at displays at the Stock Exchange in Madrid Thursday Nov. 25, 2010.
Brokers look at displays at the Stock Exchange in Madrid Thursday Nov. 25, 2010.   (AP Photo/Daniel Ochoa de Olza)
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Europe can afford the collapse of Ireland, even perhaps that of Portugal, but not that of Spain, so Spain’s ultimate line of defense is in fact this knowledge that it’s too big to fail and that it represents a systemic risk for the euro.
- Pablo Vázquez, economist

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