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Markets on Edge as Spain Blinks on Bailout

Aaron Task
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For weeks now, Spain and Germany have been playing a game of chicken. It now appears both sides are flinching.

In late May, Spanish Prime Minster Mariano Rajoy stubbornly declared that Spain did not need, nor would it seek a bailout of its struggling banks. Now reports are swirling Spain will do just that, as early as Saturday, following a Fitch downgrade Thursday.

According to Reuters, EU ministers are scheduled to hold a conference call on Saturday to discuss relief for Spain's troubled banks. "The government of Spain has realized the seriousness of their problem," a senior German official tells Reuters.

German officials, too, seem to have realized the seriousness of the situation, most notably Chancellor Angela Merkel.

"It is important to stress again that we have created the instruments for support in the euro zone and that Germany is ready to use these instruments whenever it may prove necessary," Merkel said Thursday.

Of course, the devil will be in the details of any bailout and financial markets were on edge Friday as money once-again flowed into the perceived safety of U.S. Treasuries and the dollar.

The goal is to reach an agreement to aid Spain before the Greek elections on June 17, which could cause massive upheaval if opponents of the euro win. Fitch estimates Spain's banks need at least $60 billion but the tally could reach $100 billion, or 9% of Spain's GDP, in a worst-case scenario.

Then there are the conditions of any relief. One reason Rajoy has publicly denied any need for aid is because he doesn't want Spain subjected to the same conditions that accompanied bailouts of Greece, Ireland and Portugal.

Rajoy has been betting that Spain is "too big to fail" and can call thus dictate the terms of its relief. The bigger game is whether Spain's woes will compel Germany to accept that the EU needs "European solutions," whether in the form of Eurobonds or a more unified banking system.

The bet here is the Europeans will continue to play "small ball" and attempt to kick the can down to road again, but it increasingly seems like they're running out of room.

For related coverage see:

Stiglitz on Europe: Soros Is "Being Generous" Giving Them Three Months

One Way or Another, Europe Holds Key to Market's Fate

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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