It’s certainly not looking pretty. Spain's prime minister, Mariano Rajoy has warned there’s no alternative to austerity – this when unemployment’s already up to 23% overall, rising to 50% amongst young people. Meanwhile central bank governor Miguel Ángel Fernández Ordóñez stoked the panic further, saying the banks will need a new bailout. The result of all this? Interest rates on 10-year Spanish bonds hit 6% for the first time since January, while stocks fell to a three-year low.
You can’t really blame investors for any nervousness. Greece is one thing, but when you’re dealing with a crisis in the eurozone's fourth-biggest economy it’s definitely ‘squeaky bum time’, to borrow a phrase from Sir Alex Ferguson. Last year, Spain missed its deficit target of 6%, instead managing only 8.5%. The Eurozone wants that to be cut to 5.3% this year, and 3% in 2013 – an impossible task according to Spanish economists. And they're not just being wet – its economy is slated to shrink by 1.7% this year, and that's before you factor in the adjustment of more than Eur60bn over the next two years.
At least the world's financial leaders will have plenty to chat about when they convene in Washington for next week’s half-yearly meeting of the International Monetary Fund. There’s also the small matter of Italy – where the coalition government is facing growing hostility to reforms of its labour market and the scale of its public debt. The government’s rumoured to be preparing to downgrade its growth forecasts too. Meanwhile Greece will be also back in the picture again soon. Not only are its shipping workers on strike, but its government is holding a general election on 6 May. We suspect austerity may well be on the agenda there too.
The effect of all this uncertainty has been widespread: stock markets plunged around Europe, signalling the end of a period of respite bought with €1tn (£824bn) of cheap loans to banks from the European Central Bank in recent months. Meanwhile New York has now suffered five consecutive days of decline. The Euro is slipping against the dollar and yen. Things have calmed since the initial panic, but the overall picture would look less bleak if it seemed like anyone had a convincing answer. The European Central Bank’s emergency measures, including its ominous-sounding ‘repo’ operation offering cheap money to troubled banks, certainly hasn’t done the job in Greece as it was hoped.
So the ECB will be forced to come up with something pretty spectacular in the next few weeks to prevent this escalating. IMF head Christine Lagarde is likely to use the renewed crisis in the eurozone zone to seek support for an increase in the fund's resources. Here in the UK there's very little to be done but wait and see what happens...