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In Europe, the “Vicious Cycle” Continues

Aaron Task
Editor in Chief
Daily Ticker

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Yields on Spanish and Italian debt were rising again Tuesday, Fitch warned Spain won't meet its budget-deficit targets and Morgan Stanley raised its odds of a euro breakup to 35%. Welcome to the second trading day since the weekend bailout of Spanish banks!

While questions are still being asked about the details of the 'Spailout', including basics such as the rate on the loan, most experts believe they know the answer to the big question: It wasn't enough.

"Although this is, compared to previous rescues, a step forward...it's not big enough and bold enough for what's needed right now," Zanny Minton Beddoes, economics editor of The Economist. "When investors worry about the very existence of eurozone in the future, you need to do something much bolder than just having a rescue of Spain's banks to convince them."

While Spanish officials made a big deal about the bailout being of the banks and not the sovereign, Minton Beddoes notes the Spanish government is ultimately on the hook.

"The vicious cycle between the weakness of Spanish banks and the sovereign is still there," she says. "Much better would be to recapitalize Spanish banks directly."

As with many others, Minton Beddoes supports "some form of debt mutualization," a.k.a. eurobonds, to address the crisis, as well as a full scale banking union in Europe.

The political challenges to these economic measures were on full display Tuesday. In an interview with The FT, EU Commission President Jose Manuel Barroso expressed support for a EU banking union, saying "there is now a much clearer awareness among European member states about the need to go further in terms of integration."

But U.K. Chancellor of the Exchequer George Osborne and Sabine Lautenschläger, VP of Germany's Bundesbank, each threw cold water on the idea.

"The extremely important discipline of the market would be partially lost," Lautenschläger said in a speech in Berlin. "Even more seriously, joint liability for banks would, at least, partially extend to the sovereign bonds of these countries."

Meanwhile, Irish voters are understandably outraged Spain seemingly didn't have to accept the same tough austerity measures as Ireland was forced to absorb for its bank bailout in 2010. And, of course, all this is happening just days before critical elections in Greece. The Spanish bailout was designed, in part, to reduce the potential fallout from the Greek vote. But now it seems to have only served to up the ante for Sunday's vote.

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