Italy and Spain test European bailout plan

By Bill Wilson

In the past month, the European sovereign debt crisis has reared its ugly head again.

No, not in Greece, but this time in Italy and Spain. There interest rates on 10-year bonds have jumped from lows of 4.81 percent and 4.87 percent, respectively, to 5.53 percent and 5.87 percent.

Last year, rates had gotten as high as 7.26 percent in Italy, and 6.7 percent in Spain, before the European Central Bank (ECB) intervened with more than €1 trillion of kick-the-can low interest refinance loans to banks so they have the money to continue to lend to bankrupt governments.

During that time, according to the New York Times’ Liz Alderman, “Spanish banks increased their holdings of government securities by €68 billion and Italian banks by €54 billion, both buying especially debt from their own countries.”

After that, rates collapsed, but are again creeping up, this time over concerns Spain cannot control its deficits. That’s not really news. Spain had announced at the end of last year its deficit would be much larger than expected.

What’s different now is Spain did not have much debt coming due earlier this year — just €1.3 billion in Feb. — until April, when it has a full €11.9 billion to refinance. That was when the rates suddenly spiked.
For comparative purposes, Italy had €53.4 billion coming due in the first quarter, during which rates were collapsing.

This distinction has not been lost on the Italian Prime Minister Mario Monti, who last month blamed rising rates on Spain, saying, “It doesn’t take much to recreate risk of contagion… [Spain] hasn’t paid enough attention to its public accounts.”

Spanish Prime Minister Mariano Rajoy, not wishing to be singled out, then warned Italy against issuing such proclamations in a rather pathetic display.

Said Rajoy, “We hope that they assume their responsibilities and are more cautious in their statements. We don't talk about other countries. We wish other EU and euro zone countries the best. What is good for Spain is good for the euro zone.” Indeed.
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