The euro plunged further into crisis yesterday as investors sold off Spanish, Portuguese and Belgian government bonds in record numbers on renewed fears that those nations would follow Greece and Ireland into the financial emergency ward, undermining confidence in the single currency.
The spreading contagion suggests the markets now view the break-up of the euro as a realistic possibility, and that "shock and awe" efforts to shore up individual economies with huge bailouts have not succeeded in insulating their neighbours from infection.
Spain, in particular, is regarded as being "too big to save".
The extra "risk premium" demanded by investors to hold Spanish government debt hit new highs during trading yesterday, and the cost to Madrid of raising money over a three-month period is the same as that demanded from the German Government over a five-year term, reflecting an extreme level of nervousness about the Spanish state's ability to repay its debts. The looming possibility of Spanish insolvency would dwarf the problems of Greece, Ireland and Portugal combined.
There were also what analysts called "clear signs of stress" across the European financial system, as banks were forced to turn to the European Central Bank for emergency funding. In moves reminiscent of the original credit crunch in 2007, the ECB has lent some €531 billion ($932 billion) to European financial institutions at ultra-cheap rates of interest, effectively a life support system that ECB president Jean-Claude Trichet believes is unsustainable.
As so many nations' banking systems are state-guaranteed or nationalised, this also adds to the pressure on governments, individually and across the EU, to find a more permanent solution to the crisis. Sterling hit a near two-month high against a struggling euro, and the US dollar, a relative safe haven, was also up against it.
Slovakia's Finance Minister, Ivan Miklos, yesterday become the latest European figure to question the euro's long-term survival, saying "the risk of a eurozone break-up is very real". Slovakia joined the euro last year.
On Wednesday, the German Chancellor, Angela Merkel, reflected the deep anxiety felt in Germany about events when she commented that the euro was in an "exceptionally serious" position.
European Council President Herman Van Rompuy said last week that the European Union itself was in a "survival crisis". Or, as Merkel says: "If the euro fails, Europe fails." A poll of economists conducted by Reuters revealedmost expect a bailout next for Portugal.
But it is Spain that offers the single greatest challenge to the future of the euro. Many fear that even the resources of the €750 billion European Financial Stability Fund, the vehicle for the present round of bailouts, will be insufficient to stem the tsunami of money flowing out of these stricken countries.
The bailouts of €110 billion and €80-€90 billion for Greece and Ireland respectively have been big enough to meet their financing needs for the next two to three years. But such an exercise for Spain, a far larger economy, would mean finding a "whopping" €420 billion, say analysts at Capital Economics in London. It could easily be more, however; Spain's banking system, like the UK and Ireland hit hard by the bursting of a property bubble, has liabilities of €3464 billion, compared with €1658 billion in Ireland.
Jennifer McKeown, a senior European economist, added: "Such concerns are understandable, given Spain's resemblance to Ireland. Public borrowing there surged during the recession after a property-fuelled boom. Its banks are fragile and sky-high unemployment and falling house prices point to a risk of further huge defaults on domestic loans. Meanwhile, Spain's weak competitive position leaves little scope for it to export its way out of the economic gloom."
With Belgium shaping up as the next "domino" to fall, the contagion of the euro crisis has spread from the peripheral and southern nations for the first time to a northern economy at the heart of the European Union.