The situation in Spain raised new alarms about the European debt crisis and helped drive U.S. stocks lower Thursday. By mid-afternoon, the Dow Jones industrial average and the Standard & Poor’s 500-stock index were down nearly 2 percent, and the tech-heavy Nasdaq was off more than 2.2 percent.
The lack of willing lenders could send countries into bankruptcy faster than the high interest rates alone, analysts say, because countries can typically withstand a temporary spike in borrowing costs. But if they can’t find anyone to lend to them at any price, that’s a sign of more dire straits, because unlike most countries that can print money in an emergency, they have no lender of last resort.
Fewer investors lining up for Spanish bonds “is worrying,” said Ben May, an economist at Capital Economics. “That does suggest that even though the government is paying out a quite high interest rate, there’s still limited demand,” though he noted that the timing of when Spain’s big debts come due means it can probably hold out against the market for months.
An election Sunday will likely bring a tidal wave of support for a new conservative Spanish government that analysts expect will impose economic reforms — so long as worries in the rest of the euro zone don’t sweep across its border first.
Germany and France, the countries at Europe’s core, have been having an increasingly public debate over whether to have the European Central Bank guarantee that it would buy the debt of troubled euro zone countries — thus cutting the liquidity risk that countries like Spain are trying to contain.
France, facing a spike in borrowing costs despite being one of the euro zone’s two heavyweights, desperately wants to give the central bank sweeping new powers to intervene in the crisis.
“We consider that the best way to avoid contagion is to have a solid firewall” provided by the bank, said French Finance Minister Francois Baroin in a speech in Paris late Wednesday, Bloomberg reported. “We haven’t won the argument.”
In Germany, where deep fears of inflation have prompted more fiscal conservatism than in neighboring countries, Chancellor Angela Merkel held firm in a speech Thursday against the rising demands from the rest of Europe. Condemning Europe’s focus on “one quick solution after another,” Merkel said that if the bank were to step in now, it would provide short-term calm at the expense of long-term competitiveness, the Associated Press reported.
She even went so far as to compare the prospect of central bank intervention to her native communist East Germany, saying that when the Iron Curtain fell in 1990, she “saw the chance . . . to switch to more competitive surroundings — which I’ve found good for 21 years now.”