With yields on Spanish 10-year bonds hitting the 7% yield barrier again, the European sovereign debt crisis looks set for another flare-up. With this concentrating minds, no doubt, European Finance ministers have approved release of the first tranche of the €100 billion fund made available to bailout the Spanish banking sector. The move will require approval from some member state governments, but that ought to be a formality. It is hoped that the first €30 billion instalment of the money will be released before the end of July.
The ministers also agreed to soften the deadline for Spain to restore its deficit to the 3% level mandated in Eurozone convergence requirements. The deficit was set to be cut by 2013, but a one year extension to this period has been granted. This ought to mean that austerity measures can be eased slightly to provide the Spanish economy with a little breathing space. Hopefully, the yield on Spanish bonds will relax somewhat now as analysts claimed that doubts that the finance ministers would take concrete steps to help Spanish banks had been a driver towards higher yields.
Eurogroup President Jean-Claude Juncker explained that: "We are aiming at reaching a formal agreement in the second half of July, taking into account national parliamentary procedures, allowing for a first disbursement of 30bn euros by the end of the month to be mobilised as a contingency in case of urgent needs in the Spanish banking sector. There will be specific conditions for specific banks, and the supervision of the financial sector overall will be strengthened".
Although €100 billion has been earmarked for supporting the Spanish banking sector, the exact support required may not become clear until the autumn. It seems clear that the Eurozone will do all in its power to avoid Spain or Italy from being forced to ask for national bailouts. The damage that bailouts for such major Eurozone economies would inflict on the credibility of the Euro would be too serious to contemplate.