Raining in Spain

The EU's sovereign debt crisis is back in focus after Moody's Investor Services downgraded  its rating on Spanish government debt from Aa1 to Aa2 with a "negative outlook". The media question whether EU leaders are aware of the real problems.

Credibility gap

... Europe's powerbrokers continue to drift through this crisis, rather than making a serious attempt to tackle it. Consider one reason Moody's gave for its downgrade: its analysts now believe that Spain will require an extra €40bn-€50bn to restore its banking sector to full stability — which might rise to €110bn-€120bn in a "stressed" situation. Compare that to the €15bn that Spanish officials yesterday ordered banks to raise. Not only is there a gulf between those figures, there are very few people in financial markets (or elsewhere) willing to back the estimates from Madrid. ...

Putting on a brave face

It's time for EU leaders to face up to a truth they would rather ignore: that the EU's sovereign debt problem is inextricably linked to bank solvency, writes The Wall Street Journal.

... Ireland offers the clearest example of how an insolvent banking system can rapidly take down the otherwise healthy economy that guarantees it. Spanish banks are among the most exposed to risk in Portugal, which is busy putting on the same brave face that we saw from Dublin and Athens before they accepted billions in European rescue funds. German and French banks in turn are heavily exposed to Spanish risk, and European banks' total exposure to Spain alone exceeded €700 billion as of last September. The big difference is that Spain might be too big and expensive for Europe to bail out. ...