Spain: Too big to save, but too big to fail?

Michael Babad

Globe and Mail Update –
Published Thursday, May. 31, 2012 7:46AM EDT

pain’s fortunes
Global markets are somewhat calmer today after tumbling yesterday over fears of “Spanish Flu,” but the banking issues surrounding the latest trouble spot in the euro zone are going to be with us for awhile.

As our European correspondent Eric Reguly writes in today’s Report on Business, Spain is different than Greece, Ireland and Portugal because it’s so much bigger and thus would be far more costly to bail out.

Indeed, it may be too big to save. But at the same time, it may be too big to fail lest its collapse cripple the monetary union. Amid all this, of course, and key to the future of the 17-member group, is just how the Germans are wiling to put up with.

While Spanish fears have subsided, Europe remains very much in focus today as Ireland holds a referendum on whether to join the European Union’s fiscal compact. Polls suggest the Irish will approve the pact.

“Today is one of those ‘calm after the storm’ days, as everyone dusts themselves down and tries to work out their next moves,” said David Jones, chief market strategist at IG Index.

“Spanish and Italian yields have edged lower, while the dollar index is slightly down this morning. Nonetheless sentiment remains fragile, since Spain is still only a few basis points away from a bailout. A referendum in Ireland today will keep markets cautious, although it seems that the Irish people will do as they are bid by the EU and vote ‘yes,’ removing at least one point of uncertainty.”

Slowing inflation in Europe and better economic data from Germany is also helping to buoy markets, though U.S. numbers are keeping a lid on sentiment.


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