Southern Europe is Like a Powder Keg Waiting to Explode

on Jun 13, 2012
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Early Wednesday trade saw the Euro under heavy pressure as the usual suspects – Spain and Greece – played their part, contributing yet again to the uncertainty that has taken over the currency market. The factors that had biggest impact on the market were the grim outlooks for the Spanish economy and the upcoming Greek elections this Sunday.

Spain’s banking sector is falling apart and it seems that despite the rescue approved by 17 Eurozone nations over the weekend, a strong degree of confidence hasn’t been restored.. Despite the vast amounts of money (€100 billion) designed to rescue the Spanish banks, the economical future of the country is at stake.
Spain’s troubles continue as Fitch downgraded another 18 Spanish banks on Tuesday, following the downgrade of Santander and BBVA – Spain’s two biggest banks.

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German chancellor Angela Merkel said that there will be conditionality for Spain, regarding the loan and emphasised on the need for decisive reforms.
!m[](/uploads/story/143/thumbs/pic1_inline.png)“There will of course be conditionality for Spain, when the application comes, namely a restructuring of its own banking system to make it fit for the future,” said Merkel, speaking to members of her conservative CDU party in Berlin.

Instead of calming the markets, the bailout only raised new questions and doubts. What would be its impact on the debt? How the loan would be implemented? Will it be enough, or is it just the first step to rescue the large nation, which is in deep recession and suffers from high unemployment? These are just some of the questions that keep the market on its toes.

The markets reacted negatively to the economic situation in Italy too. Despite the claims of the Italian Prime Minister Mario Monti that Italy won’t need a bailout to deal with the economic dept crisis, there are strong concerns about the ability of the country to handle the situation, with it facing a huge public dept of 1.9 trillion euro. The fear is that Italy could be the next domino to fall. Italy’s 10-year government bond yields have reached a high of 6.301 percent.

Cyprus is under pressure as well, as Finance Minister Vassos Shiarly admitted on Monday that the country needs a bailout urgently, in order to recapitalize its banks by June 30. On Tuesday, Moody’s rating agency downgraded two Cyprus banks due to the country’s high exposure to a possible exit of Greece from the Eurozone.
Everyone is now waiting for the upcoming Greek elections on Sunday as their outcome could have huge impact not only on the currency market but on the future of the euro and the Eurozone. For many, though by no means for all, the worst case scenario is that Greece returns to the drachma. Such a development is possible, should the anti-austerity party Syriza win the elections, rejecting the terms of Athens’ bailout. This may very well lead to Greece’s departure from the eurozone.

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