The post-summit calm lasted just a few days. The Spanish risk premium has once again risen above a sustainable level, Spanish bonds are at their upward limit and the stock market has taken the heaviest beating of all.
Rumors abound that ratings agencies will slash Spain's credit score even more, the United States economy will enter a recession, the IMF will lower its forecast for global macro growth, talk that Spain won't get direct recapitalization for its banks, dissent from 160 German economists who disagree with the summit agreements and a long list of other unsolved problems.
Spain has some big issues to confront: the terms of the Spanish financial sector bailout and what cutback measures the Spanish government will finally adopt. Analysts agree that these measures are going to influence heavily Spain's effort to restore credibility. The EU custom designed the plan, and Rajoy just needs to cut the cloth. But how he does so will determine Spain's economic future. The cutback should hit hard, because this is not the time to pull fancy policy tricks that won't fool anyone. The government has very few chances to prevent credit markets from closing in Spain and a full intervention.
These aren't doomsday theories. It's necessary to do what we can while now so that we avoid losing sovereignty, which would give the EU the power to decide how to impose cutbacks. What happened in Greece, Portugal and Ireland shows how painful and frustrating such an experience can be.
The national government should put aside the political consequences of its actions and just do what's necessary, even if it hurts. Aspirin doesn't cure cancer.
