Tags: European | Debt | Crisis | ecb

Analysts: European Debt Crisis Making a Quick Return

Tuesday, 17 April 2012 11:02 AM

The European Central Bank (ECB) has offered low-interest loans to banks in an effort to ease credit conditions and stave off the European debt crisis.

It's worked up to now, but the crisis will return now that the larger Spanish economy is in trouble, which will be harder to battle than Greece, so expect the European debt crisis to heat up.

"I think it's basically the markets are now really bearish on Spanish and Italian debt," Eimear Daly, foreign-exchange market analyst at Schneider Foreign Exchange, tells CNBC.com.

"Spain is basically hostage to bond investors. What all the yields are showing is that the markets think that if someone needs a bailout, it will be Spain."

Investors are nervous Spain will run into problems financing itself.

The cost of insuring Spanish sovereign debt against default has been soaring lately, pushing the yield on the country’s 10-year bonds above 6 percent level on concerns Spain will miss targets to narrow its deficits.

"If we have a situation where ten year Spain [bond yield] stays in a range of six to seven percent for 6-12 months, I think that raises a very serious question as to whether Spain would have to go to the ESM (European Stability Mechanism bailout fund) to re-finance," Bob Parker, senior advisor at Credit Suisse, tells CNBC.

On top of ECB liquidity injections, known officially as long-term refinancing operations, calls are arising for the European Central Bank to step in and buy up Spanish debt in the market to calm the financial sector.

Now that the crisis is brewing again, some are worried the entire continent needs to brace itself again, as without direct intervention, the ECB's low-cost loans won't work.

"We are back in full crisis mode," says Rabobank strategist Lyn Graham-Taylor, according to Reuters.

"It is looking more and more likely that Spain is going to have some form of a bailout. Assuming there is not an (ECB) intervention you would not see a cap on Spanish yields, they would just keep increasing."

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Tuesday, 17 April 2012 11:02 AM
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