The markets didn't get the break people were hoping for after Greece's conservative New Democracy party won elections held on Monday. During the day the stock market fell nearly 3%, sovereign debt reach an alarming 589 basis points (crushing all previous records) and Spanish 10-year notes reached 7.285%. This interest rate is a historic maximum since the euro was established as Europe's common currency in 1999.
The situation is unsustainable now that Spain is going through a short-term intervention, although Prime Minister Rajoy has refused to recognize the seriousness. He keeps putting unnecessary roadblocks in the way toward Spain meeting obligations imposed by international organizations.
Discounting the effect of Greek elections, the real reason that market confidence is flagging resides in suspicions that the 100 billion euro loan that the Eurogroup granted to Spanish banks might not be enough to cover what Spain's banks need now that credit markets are dried up because the ECB has not bought Spanish treasuries for fourteen consecutive weeks. The situation could change, however, if a proposal raised by Germany, France, Italy and Spain is ultimately accepted by the Eurogroup when it meets on June 28 and 29.
These four countries are working on a joint plan to establish banking and fiscal union throughout the EU. The plan would create mechanisms for injecting near-term capital into the financial system. Likely leading to a redrawing of the Maastricht Treaty of 1992, the proposal will be finalized in a meeting in Rome on June 22. It is the last cartridge in the chamber for Spain. If it doesn't hit the mark, then the country will face a full intervention.
