WHILE the market is still betting a solution will be found to the worsening Spanish bank crisis, there exists a very real possibility these efforts will fail and that several countries, including Ireland, could be forced out of the eurozone.
On the plus side, there seems to have been very little short selling of Spanish government bonds. This means investors still expect the EU to cobble together some "solution" to the Spanish crisis.
As against this, ECB president Mario Draghi's statement on Thursday that the eurozone was now "unsustainable" in its current form should have sent shivers down the spine of every investor. When a central bank boss feels the need to rubbish his currency area in such a public fashion, it is clear that things have gone very badly wrong.
Further ratcheting up the pressure in this war of nerves was the sudden resignation of Bank of Spain governor Miguel Fernandez Ordonez.
As things stand, Spain is resisting ECB pressure to apply for an Irish-style bailout and is holding out for an EU mechanism to recapitalise their banjaxed banks. With the Brussels-based Centre for European Policy Studies thinktank having already estimated that the Spanish banks will need to write off up to €270bn of bad loans, Germany and the ECB are strongly resisting Spanish efforts to have Europe (ie: Germany) pick up the tab.
So who will blink first in this stand-off?
While the likelihood must still be that the two sides can reach some temporary accommodation, the danger with expecting the other guy to blink first is that neither side blinks until it is too late to avert disaster.
If that were to happen, it is difficult to see the eurozone surviving in its current form. Not alone would the long-expected Greek departure, followed almost immediately by Cyprus, finally occur, it is difficult to see how either Spain or Portugal could stick with a single currency.
Would the German central bank use the opportunity to press for a clean sweep and push Italy and Ireland -- despite the referendum result -- out also, reducing the eurozone to a more manageable Germanic core?
Sunday Indo Business