Posted by AzBlueMeanie:
Just as every legitimate economist predicted, the austerity measures by the European Union to resolve its Euro financial crisis are insufficient and misguided, and are not working. European markets teetering on fears that bank bailout will fall short:
Spanish borrowing costs soared for the third-straight trading day on Monday as fears grew that the country’s teetering financial situation was too dire to be calmed by a limited bailout of its banking system.
European leaders have worked to stanch their economic crisis in recent weeks, giving Spain a partial bailout targeting its banks and considering additional European oversight for those banks. But investors on Monday were trading Spanish 10-year bonds at euro-era highs as markets dropped and officials braced for a tough stretch of negotiations about Europe’s future.
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The Bank of Spain added to the bad news Monday, announcing that the Spanish economy shrank by 0.4 percent in the second quarter of 2012, slightly worse than at the beginning of the year. Spanish media reports over the weekend said that six of Spain’s troubled regional governments were preparing to ask the national government for financial assistance. Should that happen, Spanish leaders would come under more pressure to ask for aid beyond the $121 billion that was earmarked for their banking system last month.
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The new fears over the euro zone’s fourth-largest economy sent the currency to its lowest levels in more than two years, at $1.21, and pushed Spanish and German markets down by more than 3 percent on Monday, with Spanish regulators imposing a ban on short sales on Spain’s stock indexes to try to keep markets from plunging further. The reaction suggests that the initial bailout may turn out to be insufficient before it has even formally gone into operation. That will take place this week.
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In a sign of the heightened concerns, Spanish Economy Minister Luis de Guindos is to head to Berlin on Tuesday for talks with German Finance Minister Wolfgang Schaeuble.
But Germany is more focused on Greece than on Spain, with some German officials over the weekend saying that they will not commit any more money to the struggling country.
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An international team of Greece’s lenders planned to visit Athens starting Tuesday to talk with the new Greek government about its plans to meet the tough demands of its $158 billion bailout plan. Over the weekend, Germany adopted an increasingly pugilistic tone while drawing a line against any more aid for the troubled Mediterranean nation. So, the coming weeks could bring an intense round of private lobbying by officials who would rather be on the beach.
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“A Greek exit from the euro zone has long since lost its horror,” German deputy chancellor Philipp Roesler told ARD television Sunday.
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The German news magazine Der Spiegel reported Monday that the International Monetary Fund was also threatening to withhold new funding from Greece. The IMF said in a statement Monday that it was “supporting Greece in overcoming its economic difficulties,” without specifically addressing the Spiegel report. Last week, IMF officials called for the European Central Bank to intervene to reduce Spain’s and Italy’s borrowing costs.
For now, Greece’s future in the euro zone appears to be a matter for negotiation.
“There are still some options that could keep the IMF in, although there are significant risks that the plug could be pulled altogether, given the increased zero tolerance on slippage from North European countries,” Nomura analysts Dimitris Drakopoulos and Lefteris Farmakis said in a research note Monday.
Brad Plumer writes at Ezra Klein's WonkBlog, Germany sounds ready to kick Greece out of the euro:
Does Europe need another week full of panic? Not really. But that seems to be on order anyway. Spain’s borrowing costs are already rocketing to unsustainable levels as investors worry that the world’s eleventh-largest economy is mired in endless recession with no chance to ease its debt burden. And, if that wasn’t enough, there’s now renewed chatter that Greece might get kicked out of the euro zone.
Greece’s problems look severe. To date, the country has received pledges of €240 billion ($291 billion) in rescue aid from the European Community, the European Central Bank and the International Monetary Fund. In return for that assistance, however, Greece was supposed to whittle its debts down to 120 percent of GDP by 2020.
It’s not clear what the rationale behind this exact target was. At the time it was proposed, many economists called it arbitrary and unrealistic. Greece is already trapped in one of the worst depressions in modern history. The government is under intense public pressure to ease up on the €12 billion in planned tax hikes and spending cuts in 2012. What are the odds it will meet this goal?
Yet IMF and European officials declared the 120 percent target sacrosanct. And it could prove fatal for Greece. Over the weekend, Der Spiegel quoted a few anonymous E.U. officials who agreed that there was no way Greece would make its debt goals. In that case, the Greek government will likely need another €10 billion or €50 billion of aid just to stay afloat. But according to Der Spiegel, neither Germany nor the IMF appear willing to extend more aid.
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Of course, if Greece exits the euro, everyone will start worrying that Spain or Italy could be next. Investors could start betting on a Spanish exit, which would risk becoming a self-fulfilling prophecy. Which means the euro zone will likely need a bigger bailout fund to quell any panic. But Europe’s new €500 billion ($605 billion) European Stability Mechanism won’t be ready until at least mid-September, when Germany’s constitutional court decides whether or not to block the fund’s creation. Without that fund, a Greek exit might not be so horror-free after all.
The Euro financial crisis is reaching critical mass. As I have said before, this contagion will not be contained to Europe. We live in a global economy with a global financial system. This will negatively impact our U.S. economy and job growth. We cannot inoculate ourselves from the crisis in Europe.