Eurozone policymakers face one of their most testing weeks yet, confronted by alarm on the financial markets following Spain’s bail-out request and the consequences of Greece’s general election.

Weeks of uncertainty over Greece’s future – out of the eurozone or firmly inside – could come to an end late on Sunday (17 June), after days of speculation about contingency plans for a Greek exit that served only to increase the feeling of anxiety.

As if that were not enough, renewed market tension following Spain’s bail-out move raises the prospect of contagion spreading to Italy, the eurozone’s third-largest economy, and it now looks inevitable that Cyprus will need a rescue too.

After months of denials, Spain’s government notified the eurozone’s finance ministers during a conference call on Saturday (9 June) that it would seek funding to help shore up its fragile banking sector. Ministers said that Spanish authorities would submit a formal request “shortly”.

The move was immediately welcomed by politicians around the world, including in the United States and Germany; and financial markets opened calmly on Monday morning, suggesting that Spain’s decision would help restore confidence throughout the eurozone.

But the optimism was short-lived. Within 24 hours, stocks were falling in exchanges across Europe and yields on sovereign bonds in Spain – and, crucially, in Italy – were rising, suggesting that investors were unconvinced that the Spanish bank bail-out would be a magical cure for the eurozone’s woes.

Yields on Spanish ten-year bonds, a crucial indicator of investor confidence, leapt to 6.81% on Tuesday (12 June), a record eurozone-era high.
Italy’s bonds reached 6.22%, their highest level since January. Italy was scheduled to auction about €4.5 billion worth of bonds today (14 June) and with yields rising it will add to fears of a crisis domino effect.

Italian dilemma

Fact File

Spanish uncertainty

Questions remain over which eurozone rescue fund – the temporary European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM) that comes into operation on 1 July – will be used in Spain’s bank bail-out.

Spain’s government indicated that it wanted the EFSF to be used because it does not have preferred-creditor status. Germany’s government prefers the ESM: this would mean that eurozone loans would have to be paid off before private lenders in case of default. Eurozone finance ministers are expected to discuss this when they meet in Luxembourg on 21 June.

Unlike the rescues of Greece, Ireland and Portugal, the terms of the bail-out will not oblige Spain to implement austerity measures, and the loans would be used only to recapitalise the financial sector. Nonetheless, finance ministers said that the money would be conditional on Spain’s progress in meeting its fiscal targets.

The extent of monitoring by the ‘troika’ – the Commission, the European Central Bank and the International Monetary Fund – looks set to be a contentious issue.

Mariano Rajoy, Spain’s prime minister, said that there would be no major supervision, but this was contradicted by Wolfgang Schäuble, Germany’s finance minister.

On Monday, Maria Fekter, Austria’s finance minister, said that Italy could soon follow Spain in needing a bail-out. “Italy has to work its way out of its economic dilemma of very high deficits and debt, but it may be that, given the high rates that Italy pays to refinance on the markets, it too will need support,” she said.

Click Here: kanken kids cheap

Mario Monti, Italy’s prime minister, said that Fekter’s remarks were “totally inappropriate”.

The amount in loans given to Spain, the fourth-largest economy in the eurozone, will depend on the result of an independent audit of the country’s banks, expected within a week. The Eurogroup of eurozone finance ministers said that the estimated figure would be about €100bn.

Attention will shift back to Greece on Sunday as Europe’s leaders wait to see whether the left-wing Syriza coalition, which wants to renegotiate the terms of its country’s €130bn bail-out, will emerge victorious.

On Tuesday, amid reports of bank runs in Greece and plans to impose border controls and to limit the amount of money that could be withdrawn from cash machines, the Commission acknowledged that there were “discussions” about Greece’s exit from the eurozone – but said it was “not working on a Greek exit plan”.

A European Commission spokesman said that officials were providing “legal clarity” on scenarios of a Greek exit, which are being worked on by some eurozone finance ministries. “Some people are working on scenarios. We are providing information about EU law, as the guardian of the treaty,” he said.