Spain's debt crisis has returned with a vengeance after Germany, Holland and Finland reneged on a crucial summit deal and scuppered hopes of direct eurozone help for Spanish banks.
Yields on 10-year Spanish bonds punched back above the danger line of 6pc and spreads over German Bunds reached 450 basis points, intensifying pressure on Madrid as it continues to resist a sovereign bail-out.
The alliance of hardline creditors said the European Stability Mechanism (ESM) – or bail-out fund – could not be used to cover “legacy assets” from past banking crises, even after the eurozone’s banking supervisor starts work next year.
This prevents the ESM from recapitalising Spain’s crippled banks directly under a €100bn (£79bn) loan package agreed with Madrid in June.
The burden will fall entirely on the Spanish state. The Spanish newspaper Expansion said the AAA trio had “dynamited” the EU accord.
The extra debt burden is likely to be around €60bn or 6pc of GDP, depending on bank stress tests to be unveiled on Friday.
Pessimists fear it could rise to 15pc of GDP once full losses from the property crash are crystallised.
The European Commission appeared shocked by the German-led volte-face, saying the original summit deal was “quite clear”.
All EMU leaders signed a pledge to break the “vicious cycle” between banks and states. The document said the ESM must be allowed to “recapitalise banks directly”, clearly referring to Spain.
“Europe’s debt crisis may just have returned to centre stage,” said Fathom Consulting. The IBEX index of stocks in Madrid fell 3.7pc.
The Bank of Spain said the economy had shrunk at a “significant rate” in the third quarter, with all major indicators deteriorating.
This follows a GDP contraction of 1.3pc in the second quarter. The deepening slump is playing havoc with public finances. Tax revenues fell 4.8pc in July from a year ago, largely offsetting gains from austerity.
This replicates the pattern seen in Greece, where drastic fiscal tightening – without monetary stimulus or exchange rate relief – has fed a self-defeating downward spiral.
Premier Mariano Rajoy may have accelerated the sell-off by telling the Wall Street Journal that Spain will not request a full sovereign bail-out unless borrowing costs go “too high, for too long”.
“He is inviting the markets to short Spanish debt,” said Marc Ostwald from Monument Securities. “Markets now know they are fighting Rajoy, not the European Central Bank.”
The ECB says it will not buy Spanish bonds until the country requests an ESM rescue and signs a “memorandum” giving up fiscal sovereignty.
Mr Rajoy said he will decide when he learns the exact terms, but talks have become a political minefield. Madrid is gambling that a reform package and a tough Budget to be unveiled this week will suffice without further conditions.
Yet the German and Finnish parliaments must vote on each ESM rescue. They are certain to demand tougher terms. Spain in turn has issued thinly-veiled threats to bring down the euro temple on Germany’s head if pushed too far.
German bank exposure to Spain is €145bn. Desmond Supple from Nomura said Spain’s 10-year yields would rise back to 7pc over coming weeks as the stand-off drags on, not helped by the “fresh hand grenade” of Catalonia’s threatened secession.
“We fear Rajoy will try to delay a rescue until after the Catalan election. The conditions of any ESM bail-out will involve control over the regions, so this has become intractable,” he said.
Catalan leader Artur Mas has set off a constitutional crisis by calling a snap poll for November 25 – deemed a proxy referendum on independence.
“If the government refuses to allow a referendum, we will do it anyway,” he said, calling on Spain to learn from Canada’s handing of Quebec and behave in a “civilised” fashion.
Mr Mas said nothing could stop the Catalan people taking “sovereign decisions”, describing recent events as the most dramatic in the 300 years of Catalan history.
King Juan Carlos said it would be “blindness” not to recognise the gravity of the crisis. It is becoming unclear how much longer Mr Rajoy can govern.
Anti-austerity clashes with police are turning violent. The latest Metroscopia poll shows 84pc of Spaniards have lost confidence in his leadership.
telegraph.co.uk
Yields on 10-year Spanish bonds punched back above the danger line of 6pc and spreads over German Bunds reached 450 basis points, intensifying pressure on Madrid as it continues to resist a sovereign bail-out.
The alliance of hardline creditors said the European Stability Mechanism (ESM) – or bail-out fund – could not be used to cover “legacy assets” from past banking crises, even after the eurozone’s banking supervisor starts work next year.
This prevents the ESM from recapitalising Spain’s crippled banks directly under a €100bn (£79bn) loan package agreed with Madrid in June.
The burden will fall entirely on the Spanish state. The Spanish newspaper Expansion said the AAA trio had “dynamited” the EU accord.
The extra debt burden is likely to be around €60bn or 6pc of GDP, depending on bank stress tests to be unveiled on Friday.
Pessimists fear it could rise to 15pc of GDP once full losses from the property crash are crystallised.
The European Commission appeared shocked by the German-led volte-face, saying the original summit deal was “quite clear”.
All EMU leaders signed a pledge to break the “vicious cycle” between banks and states. The document said the ESM must be allowed to “recapitalise banks directly”, clearly referring to Spain.
“Europe’s debt crisis may just have returned to centre stage,” said Fathom Consulting. The IBEX index of stocks in Madrid fell 3.7pc.
The Bank of Spain said the economy had shrunk at a “significant rate” in the third quarter, with all major indicators deteriorating.
This follows a GDP contraction of 1.3pc in the second quarter. The deepening slump is playing havoc with public finances. Tax revenues fell 4.8pc in July from a year ago, largely offsetting gains from austerity.
This replicates the pattern seen in Greece, where drastic fiscal tightening – without monetary stimulus or exchange rate relief – has fed a self-defeating downward spiral.
Premier Mariano Rajoy may have accelerated the sell-off by telling the Wall Street Journal that Spain will not request a full sovereign bail-out unless borrowing costs go “too high, for too long”.
“He is inviting the markets to short Spanish debt,” said Marc Ostwald from Monument Securities. “Markets now know they are fighting Rajoy, not the European Central Bank.”
The ECB says it will not buy Spanish bonds until the country requests an ESM rescue and signs a “memorandum” giving up fiscal sovereignty.
Mr Rajoy said he will decide when he learns the exact terms, but talks have become a political minefield. Madrid is gambling that a reform package and a tough Budget to be unveiled this week will suffice without further conditions.
Yet the German and Finnish parliaments must vote on each ESM rescue. They are certain to demand tougher terms. Spain in turn has issued thinly-veiled threats to bring down the euro temple on Germany’s head if pushed too far.
German bank exposure to Spain is €145bn. Desmond Supple from Nomura said Spain’s 10-year yields would rise back to 7pc over coming weeks as the stand-off drags on, not helped by the “fresh hand grenade” of Catalonia’s threatened secession.
“We fear Rajoy will try to delay a rescue until after the Catalan election. The conditions of any ESM bail-out will involve control over the regions, so this has become intractable,” he said.
Catalan leader Artur Mas has set off a constitutional crisis by calling a snap poll for November 25 – deemed a proxy referendum on independence.
“If the government refuses to allow a referendum, we will do it anyway,” he said, calling on Spain to learn from Canada’s handing of Quebec and behave in a “civilised” fashion.
Mr Mas said nothing could stop the Catalan people taking “sovereign decisions”, describing recent events as the most dramatic in the 300 years of Catalan history.
King Juan Carlos said it would be “blindness” not to recognise the gravity of the crisis. It is becoming unclear how much longer Mr Rajoy can govern.
Anti-austerity clashes with police are turning violent. The latest Metroscopia poll shows 84pc of Spaniards have lost confidence in his leadership.
telegraph.co.uk
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