Amid Bailout Dangers, Spain Poses the Greatest Risk

By RAPHAEL MINDER
NYT

MADRID — The doomsday scenario goes something like this:

The euro zone survived the bailout of Greece this past spring, and Ireland’s application this week for financial aid should be just as easily absorbed. Even if Portugal becomes the third euro country to request a rescue, that is unlikely to break the bank. But any bailout request from Spain — with an economy twice the size of the other three combined — could spell game over for the European single currency project.

That grim picture has been kept alive by the bond markets, which have pushed borrowing costs in Spain higher — even though Madrid has recently cut its deficit and Spanish banks so far are solid enough to absorb their bad loans, mostly linked to real estate.

But even as the government moves ahead with austerity measures and structural changes to shore up the economy, the threat of Spanish banks’ exposure to the country’s collapsed construction sector — and to equally troubled Portugal — looms large.

“Spain’s banks already have enough problems, but the exposure to Portugal could just turn into the wild card which upturns the whole apple cart,” said Edward Hugh, an independent economist based in Barcelona.

(Original here.)