Friday 24 January 2020

Eurozone crisis on brink of final phase

AS Spain's plight worsens and Germany's exposure to the rest of the eurozone soars, is the long-running crisis entering its final phase? With polls showing four-tenths of voters have yet to make up their minds on next month's referendum, the timing couldn't be worse for this country.

While Spain managed to sell over €2.5bn of two and ten-year bonds at last week's auction, it was only able to do so by offering investors punishingly high yields -- almost 5.75 per cent for the 10-year bonds. That's close to the level at which this country was ejected from the international bond markets and forced to seek a bailout in 2010.

At the same time as Spanish bond yields are creeping up, deposits are fleeing its banks, with ECB lending to Spanish banks almost doubling from €169bn in February to €316bn in March. And who is financing this lending?

The German central bank, the Bundesbank, is now owed €616bn by other ECB central banks, with the amount owed jumping by €68bn in March alone. The Bundesbank's rapidly growing exposure to other central banks is becoming a red-hot issue in Germany.

Throw in the likely defeat of Nicolas Sarkozy in the French presidential elections, the probable eclipse of the establishment PAKOK and New Democracy parties in next month's Greek elections, and the latest opinion polls for the May 31 referendum here, and it is clear the tinder has been piled high.

So with unemployment at over 23 per cent, will Spanish Prime Minister Mariano Rajoy baulk at further austerity or will Bundesbank boss Jens Weidmann pull the plug on the single currency instead?

At the speed with which events are now moving, we could have our answer well before the referendum.

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