It was another ugly day in Europe. Borrowing costs in Spain surged to unsustainable levels. Italy wasn't too far behind. Then there were stocks. Those collapsed. Policymakers reacted the best way they knew how -- by banning short-selling. Just an all-around disaster.
In other words, it was Monday.
Actually, that's too optimistic. This isn't your garden-variety euro panic. This is how the euro ends. With a bang -- and soaring short-term borrowing costs.
The chart below from Simone Foxman at Business Insider compares Spanish 10-year and 2-year bond yields. The 10-year bond get most of the attention, but the 2-year bonds are the bigger story. As long as Spain's 2-year bonds are at non-ruinous levels, it doesn't really matter if its 10-year bonds are at ruinous levels. It can just borrow short.
But now they're both at ruinous levels.
This is what insolvency looks like.
Spain needs Germany or the ECB to start buying its debt. The former would mean a bailout on the order of €400 ($485 billion) or so; the latter some kind of quantitative easing. Germany hasn't exactly been eager to okay either. That's why we're in the predicament we're in now.
Well, part of the reason. The real reason is Germany's refusal to admit their policies have failed. They failed in Greece. They failed in Portugal. They failed a little less in Ireland, but still haven't exactly been a success. And they're failing in Spain, which shouldn't want another bailout.
Yes, that's right. Another bailout. It was just a month ago that Spain got a €100 billion ($121 billion) bailout for its banks. Spoiler alert: It didn't work. The headlines said that the bank bailout wouldn't add to Spain's public debt. The fine print said it would. It turned out the fine print was correct. Markets didn't like that. They didn't like Spain's regional governments needing bailouts either. Now things are worse than before.
Bailouts done the German way aren't really bailouts. They're loans. Germany gives Spain money at below-market interest rates so Spain can pay back German banks. It adds to Spain's debt, and makes that debt harder to pay back due to the austerity measures that are part of the deal. But it doesn't do anything to help Spain out of its debt trap. In other words, it trades bankruptcy now for bankruptcy later.
That's not to say later isn't better. It is. At least if you're talking about a small country like Greece. Kicking the can gives banks time to cut their exposure so that by the time the inevitable restructuring happens, it's a non-event for markets. But Spain isn't Greece. It's much, much bigger. The German public might balk at the ever-increasing price tag and the Spanish public might balk at the ever-increasing depth of their slump.
Only the ECB can square this circle. If the Germans will let it.
Europe is running out of time to choose its fate. Spain can't fund itself for long with 2-year bonds yielding 6.53 percent. Maybe a few weeks more. If Germany decides on another bailout that won't work, the euro is doomed. If Germany decides to let the ECB do its job, the euro might not be doomed.
It turns out that the only thing worse than the endless euro crisis might be the end of the euro crisis.
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Matthew O'Brien is a former senior associate editor at The Atlantic.