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European 'Virus' Spreads as Markets Close Doors to Spain

G7 meets today as fears that Spanish bailout will reverberate catastrophe across global economy

Common Dreams staff

Spain's Treasury and Public Administration Minister Cristobal Montoro listens to a question during a news conference after a cabinet meeting at Moncloa palace in Madrid June 1, 2012. (Credit: REUTERS/Andrea Comas)

Members of the G7 are meeting today in Europe to discuss how the world's largest economies should respond to the continued chaos that plagues the Eurozone, in particular Spain's worsening crisis.  Those leaders will be joined by representatives of the continent's central banks.

Reports from Spain say that the government has essentially been shut out of the financial markets, making it harder to service its debt and increasing chances of a Greece-style bailout deal. Fears of a Spanish collapse, reports Reuters, could be followed by run on Spanish banks that could ultimately spread through Europe and beyond.

Members of the Eurozone have been exchanging proposals about a stronger fiscal union, but critics worry that such schemes are 'too little too late.'

With less than two weeks before a decisive political election in Greece and Spain teetering on the edge of financial abyss, it seems that the slow-moving political maneuvers in Europe are being outpaced by economic realities.

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Reuters: Spain says markets are closing to it as G7 confers

Spain said on Tuesday that credit markets were closing to the euro zone's fourth biggest economy as finance chiefs of the Group of Seven major economies were to hold emergency talks on the currency bloc's worsening debt crisis.

Treasury Minister Cristobal Montoro sent out the dramatic distress signal in a radio interview about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain. [...]

The European Central Bank holds its monthly rate-setting meeting on Wednesday and European Union leaders meet on June 28-29 to discuss their strategy for overcoming the two-year-old crisis which has already seen Greece, Ireland and Portugal forced to accept international bailouts.

Investors have fled peripheral euro zone sovereign debt for the relative safe haven of German Bunds and U.S. and British government bonds amid worries about Spain's banking crisis and fears that a June 17 Greek election could lead to Athens leaving the euro, setting off a wave of contagion around the euro area.

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Financial Post: Europe virus fears spread: Markets recoil amid talk of run on banks

Douglas Porter, deputy chief economist at BMO Capital Markets, said Tuesday's G7 conference call "in many ways is as reactive as it is proactive."

"If there was an easy solution to this it would have long been solved," he said. "We've obviously had market concern about the situation in Europe and that's been compounded by signs of slower growth in the U.S. and China. And I think it was that confluence of events last week that's probably heightened the sense of urgency among policymakers."

These recent events show "there is some evidence that the turmoil in Europe is actually starting to affect growth in some meaningful way in the rest of the world."

Spain's troubles come as Greece faces the possible exit from the 17-nation single-currency zone. The newly elected government - which opposes the previously accepted, Germanled austerity measures meant to ease its debt problems - faces another election June 17.

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The Guardian: 'Spain Is Too Big To Bail'

As in other troubled member states, Spain's banks and its public finances are locked together: banks' balance sheets are stuffed with their own governments' bonds. As foreign investors have avoided Spanish government bonds, the local banking sector has filled the gap.

This is potentially alarming. Loynes says: "Spain are still trying to tell us that they can muddle through on their own, but that looks very unlikely."

A Spanish crisis has always been a far more worrying prospect than the troubles of much tinier Greece, which could still spark a serious crisis. Simon Derrick, currency strategist at BNY Mellon, says: "The problem with Spain is that it's an order of magnitude larger than Greece. You're talking about the eurozone's fourth largest economy; you're talking about a very large amount of money."

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