Euro debt crisis pushes back to dominate financial markets this week

09/24/2012 1:59 pm EST


Jim Jubak

Founder and Editor,

It was always going to be a busy end of the week in the EuroZone. Events today have just made the end of the week even more important.

First, today, the Portuguese government announced that it would abandon a proposed hike in the social security tax paid by workers from 11% to 18%. That move leaves the country with a big hole in the budget promises it made to secure its 78 billion euro bailout package.

Second, the IFO survey of German business sentiment showed its fifth straight monthly drop, the IFO Institute announced this morning.

Think EuroZone politicians might be just a little worried that the euro crisis is about to explode again?

Which makes Thursday and Friday big days for European and global financial markets.

Last week the Financial Times reported that Spain and the European Commission were in negotiations over the terms of a Spanish request for a formal program of bond buying by the European Stability Mechanism (initially) and the European Central Bank (eventually.) The hang-up preventing that deal has been the reluctance of the Spanish government to ask formally for help without knowing the terms of the program of budget cuts, tax increases, and economic reforms that would be imposed by lenders. Prime Minister Mariano Rajoy fears that the price will be another round of austerity and monitoring by a Greek-style troika that included the International Monetary Fund and the European Central Bank. More budget cuts and tax increases piled on top of the measures that the government has already imposed would turn the smoldering revolt by Spanish taxpayers and regional governments into a full-out war that could well bring down the current government and throw the country into political chaos. According to the Financial Times, however, negotiations have come up with a program that would focus on continued economic reforms in Spain but wouldn't add to the current austerity program in a country with 25% unemployment.

I’d expect the euro, and European and global financial markets to rally strongly if Thursday brings an announcement of a deal that looks likely to bring the unlimited bond buying promised on September 6 by the European Central Bank closer to reality.

There is a good chance, though, that markets will be disappointed since there are persistent reports out of Madrid that the government won’t ask for aid until after regional elections on October 21.

Friday is scheduled to bring a report from independent consultant Oliver Wyman on the capital needs of Spanish banks. On Saturday Economy Minister Luis de Guindos said that he expects the report to show that the sector needs 60 billion euros in capital. That would be in line with preliminary estimates from June that Spanish banks would need 60 billion euros. The European Union has pledged a 100 billion credit line to help capitalize Spain’s banks.

Expectations are, however, that the report will show that specific Spanish banks need to raise significant capital. For example, Bankia, already the subject of a government rescue, could wind up needing 6 billion euros more than previously estimated. Among banks that haven’t yet received government money, attention has focused on Banco Popular, which could face the need to raise 3 billion to 3.7 billion euros in capital according to Spanish newspapers on Saturday. On Friday, Fitch Ratings cut Banco Popular’s credit rate to junk levels.

Anything that confirms the earlier 60 billion estimate will probably be considered good news by the financial markets since it will remove some of the doubt surrounding the government’s own estimates on the capital needs of the sector. Trouble at already troubled banks is probably already priced into the market.
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS