Escape route gets narrower as Spanish bailout backfires

ANALYSIS:YESTERDAY MORE people sold Spanish government bonds than were prepared to buy them. That is exactly the opposite of what the European bailout of that country's banks was designed to do.

If the markets were not impressed by Spain’s weekend rescue at first glance, they are unlikely to be more positive in their evaluation any time in future.

That brings Spain closer to being shut out of the bond market and towards a full bailout (the mini-rescue it received at the weekend only covers the costs of propping up its banks). That, in turn, would leave Europe with little ammunition to fight another flare-up in the crisis – and one looks certain to erupt in Cyprus before the end of the month.

European minimalism fails again. That is as depressingly familiar as the consequences of further failure are frightening.

Despite the real risk of meltdown in the not-distant future, many parties to the latest bailout were at odds yesterday.

A clear difference of opinion emerged about the degree of surveillance that Madrid would be subject to under the terms of its mini-bailout.

It had appeared over the weekend that Spain would not be subject to the same sort of quarterly reviews as Ireland, Greece and Portugal are under the terms of their rescues. The European Commission suggested yesterday that it would be treated as the other three. The Spanish prime minister, Mariano Rajoy, is sticking to his line that Spain is different and the bailout is a victory. He is taking his compatriots for fools. Being reduced to extending the begging bowl is bad enough, but having your political leaders spinning that it is something to be celebrated is intolerable.

Rajoy is only half a year in office, after having won a resounding victory in November’s election. With economic hardship so severe, his political capital will be burnt through very quickly no matter how well he governs. It will evaporate if voters have their intelligence insulted. That is what the Spanish government risks by not being straight with its people.

If Rajoy’s government becomes as discredited as the main opposition party, which is blamed for its part in the crisis, then a vacuum will be created. Although Spain is one of many countries where there has been no rise in support for the political extremes, something will have to fill the vacuum if the centre weakens.

If Spanish politicians were playing with fire yesterday, Eurocrats were engaged in leaking of the most reckless kind.

Reuters, the news agency which broke news of Spain’s bailout on Friday after having been tipped off by “EU officials”, yesterday reported that the same people were planning for a Greek exit from the euro.

“European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro,” reported the news agency.

That there have been no bank runs in the European periphery to date is a minor miracle. If Eurocrats want to change that, they were going about it in just the right way yesterday.

Another Eurocrat comment yesterday was catching to Irish eyes. A European Commission statement said that senior bank bonds in Spain would “almost certainly” not be subject to losses.

The European position on senior bank bonds in every Irish bank, no matter how rotten or unviable, has been nothing but utterly and steadfastly certain – every single holder of Irish senior bank bonds would be repaid down to the last cent. Is this another tentative sign that bailout rules differ from country to country?

If it is, it is worrying, but not nearly as worrying as the scale of the wider of crisis. The path out of this fiasco is narrowing fast. With each passing day it becomes clear that Europe faces total disintegration or near-total economic integration.

And even if Europeans agree on the nature of the problem and how to construct that full economic union with matching political institutions (and they don’t), it is far from clear that there is time given how precarious the situation has become.

Worse still, there must even be doubt – given the enormous fragility of the Continent’s financial system – that that system can be kept standing even if every possible and conceivable measure and structure is rapidly put in place. Things are going from bad to worse.