Europe worries that Italy and Spain might be next

Stock markets slide amid fears that the debt crisis might spread - while Ireland reminds us of the hidden costs of a bailout.

by James Taylor
Last Updated: 19 Aug 2013
Another day, another Eurozone panic: shares have fallen across the continent this morning as investors worried that the problems in Greece, Ireland and Portugal might soon spread to Spain and Italy - which would take the sovereign debt crisis into a whole new realm of scariness. Finance ministers have promised to pass new measures to check further contagion - and are talking tough about new austerity measures. But as Ireland has demonstrated this week, all of this stuff comes at a price...

The panic appears to have been sparked by worries that Italy might not be able to pass its latest austerity proposals: popular finance minister Giulio Tremonti is leaving today's talks in Brussels to go home and hammer out the finer points, but President Silvio Berlusconi (who's not a fan of his) appeared to suggest the measures didn't have full cabinet support (the spread between Italian and Government bonds is now at record levels). There have also been reports from Spain that six of the country's banks have failed the latest round of stress tests. All of which is only fuelling the general air of fear and trepidation in the markets.

The trouble is that even if the Eurozone ever manages to agree on the right approach, implementing it will be devilishly tricky. Back in March, Ireland's Central Bank ordered four of the country’s main lenders – AIB, Bank of Ireland, EBS and Irish Life and Permanent – to raise €24bn between them to bolster confidence in the country’s financial system. Not surprisingly, the banks reached out for external help - but it was an expensive business. Bank of Ireland admitted this week that it's forking out €150m in fees for its €1.91bn rights issue, most of which will go on legal and financial advice.

Chairman Pat Molloy was apparently apologetic, but not remorseful. 'That is the cost of capital raising, I'm afraid,' he's quoted as saying in the Guardian. 'These people don't, I'm afraid, come cheap'. Throwing this much money at lawyers and consultants is, of course, the last thing a bank needs to be doing when it’s in trouble. But the stakes are high: the €24bn the banks are attempting to raise is roughly what the Government expects to collect this year in income tax and VAT.

Officials reached that figure after a third set of stress tests in March. But guess what: even that process had the bank digging deep to pay consultants. In total, the Central Bank spent an estimated €30m on advisers, who included our very own Barclays Capital, US asset manager BlackRock Solutions and the Boston Consulting Group. Proof that financial crises can be a nice little earner if you play your cards right...

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