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Don’t Look Now, But Spanish Bond Yields Rising Again

We’re supposed to not care much about Europe anymore. The risk to the global economy has shifted to a struggling United States, say all the observers (and then Ben Bernanke blames the European situation for the US struggles, and everything folds in on itself). And indeed, Europe crossed one more hurdle today when the German Budestag approved the bailout plan for Spanish banks. But it’s worth noting that none of this has actually ameliorated Spanish borrowing costs, thought to be the source of the trouble.

In a stark reminder that Spain’s financial crisis is far from resolved, the government in Madrid had to pay more to raise medium-term financing Thursday, while the yield on its longer-term debt crept back above the 7 percent level that many analysts fear eventually lead to a full-scale bailout.

The latest worrying development comes despite Germany’s approval on Thursday to provide its share of a €100 billion, or $122.8 billion, Spanish bank rescue.

I don’t know if the proper phrase is “despite” or “because of.” In exchange for passing the program, German Chancellor Angela Merkel had to promise the Bundestag that the Spanish government would ultimately be on the hook for paying back the money used in the bailout. This defeats the entire purpose of the EU summit, which allowed for direct injections into the banking sector without the involvement of the Spanish sovereign. This was supposed to reduce the market pressure on Spanish borrowing costs, as it removed that additional burden. But Germany played a game of take-backs today. And the Spanish bond market suffered.

So despite the “turning away” from Europe, the problems there are the same as ever. There is no hope for a resumption of economic growth in the near future – indeed, Spain just instituted its €65 billion austerity program, which will only cause more suffering and move the economy deeper into recession – and Spain faces a loss of access to borrowing. There’s not enough money to go around for the bailout as long as the European Central Bank refuses to do their job. And so the whole continent continues its slow move toward ruin.

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David Dayen

David Dayen