After a period of relative calm and optimism the Eurozone debt crisis has become centre stage once more with Spain being the focus of attention.
In his note, Ted provides an analysis of the abrupt rise in Spanish bond yields and assesses whether they pose a threat to the structure of the currency zone itself. He highlights the banking sector in Spain as vulnerable to the weakening economy and the property sector in particular and argues that new regulation regarding more realistic accounting assessment of banks' real estate losses are an important step towards the completion of banking sector restructuring but are unlikely to be sufficient given the state of the economy and the property market.
Ted concludes, that while a bank rescue package would provide relief to markets, it would not yield a sustainable and permanent solution, just as the bailouts of Greece, Ireland and Portugal have failed to resolve the debt issues in those countries. Spain is likely to remain in the eye of the storm even after the banks have been recapitalised. It differs from the other peripheral economy Italy because of the effect Spain's property sector collapse has had on household and corporate debt and the capital positions of the banks.
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