Firefighters hope easing winds and rising humidity will helpthem contain deadly wildfires sweeping across parts of northern Spain. Gettingthe country's smoldering finances under control will take far longer.
Days after euro zone finance ministers approved a 100billion euro bailout for its ailing banks Spain is suffering some of itsblackest days on the markets since the European debt crisis first ignitedalmost three years ago.
Spain and Germany issued assurances on Tuesday that Madridwill not need a full bailout. But the country is facing record borrowing costsas government coffers run low, pushing the euro crisis to a new level ofintensity many believe can be resolved only by a comprehensive solutionopposing camps in the European Union show no signs of reaching.
Spain isn’t the only major concern.
At the other end of the Mediterranean, new fears are growingthat Greece will be forced out of the euro.
The new government in Athens appears unable to meet itscommitment to slash its deficit and lenders are responding with threats tosever bailout lifelines keeping the economy afloat.
"There can be no further payments if Greece no longermeets its requirements," German Economy Minister Philipp Rosler said onARD TV network on Sunday. "A Greek exit has long since lost its horror forme."
Concerns for the whole euro zone surged further after themounting crisis prompted a warning from the ratings agency Moody's raisingconcerns over the outlook for Germany, the Netherlands and Luxembourg, allsupposedly healthy countries.
The New York-based agency said they are increasingly exposedeither to the risk of instability from a possible Greek euro zone exit or fromliabilities extended to cover the costs of keeping the euro zone togetherthrough support to southern countries.
Spain's key 10-year borrowing rate rose above 7.6 percent onTuesday. That's far above the 7 percent level that forced Ireland and Portugalto appeal for rescues from the IMF and European Union.
With shorter-term borrowing costs also surging, Spain is unlikelyto be able to sustain paying such interest rates beyond the summer. "We'vegot enough liquidity to keep us going for three months," the Barcelonadaily La Vanguardia quoted an anonymous senior government member as saying onSunday.
Madrid's stock exchange saw its key IBEX35 index fall over 3percent Tuesday to reach its lowest level since 2003.
The drop came despite a ban on the short selling of stocksintroduced by Spanish and Italian regulators on Monday as part of an effort tocounter speculative trading. The Spanish index is down almost 28 percent sincethe start of the year.
Although an EU deal concluded last week brought some reliefto Spain's banks, the country has complained about delays in implementing aidmeasures as concerns have extended to regional administrations.
On Tuesday, Catalonia, the country's second-richest region,indicated it would seek a bailout from the national government, following arescue request from the Valencia region last week.
"Catalonia has no other bank than the government ofSpain," Catalan Finance Minister Andreu Mas-Colell told the BBC. "Weare taxpayers in Spain and it's normal that we appeal to the Spanish Treasury’sbanking services."
Spain has set up an 18 billion euro fund to supportdebt-ridden regions that Spanish and European Union officials say is sufficientto cover any likely requests. Catalonia is believed to need just over 7 billioneuros to cover its finances to the end of the year.
The creeping regional debt crisis further spooked markets,as did signs the 65 billion euro in budget savings the government recentlyannounced would probably prolong the country's recession beyond 2013.
Spain's bank bailout transferred market jitters from theprivate sector to the national debt because the money will be channeled throughthe state, which is obliged to guarantee loans.
That’s reinforced a growing realization that the only way tosave Spain from a bailout is for the European Central Bank, the ECB, tointervene on markets to buy Spanish bonds, something it can ill afford.
Nevertheless, Spanish ministers are no longer the only onespressing the ECB to act. "If it becomes necessary to intervene again [tohelp Spain], it should be by increasing the so-called firewall protection, orthrough interventions of the Central Bank," French Foreign MinisterLaurent Fabius told France 2 television on Tuesday.
The ECB is also seen as the only institution that canintervene with sufficient speed, if necessary, to help Italy, which is alsofacing market pressure.
The Central Bank bought more than 200 billion euros ingovernment bonds to head off a similar bout of market panic over the EU's bigsouthern economies last summer. The Frankfurt-based ECB later injected atrillion euros into the banking system. Those moves were widely praised forbringing the euro zone back from the brink of collapse.
However, the bank is reluctant to act again, not leastbecause of fears of a public backlash in Germany, Austria, Finland and theNetherlands. Many of their residents don’t support what they see as mutualizingother countries’ debt problems and weakening their incentive to tighten belts.
The clash between opposing views in the north and south ofEurope has been the root of the euro zone debt crisis since its earliest daysin 2009 and the current debate shows Europe is still far from resolving it.
It looks like the recipe for another torrid summer on theEuropean financial markets.
