Europe’s Worst Fear: Spain and Greece Spiral Down Together

[New York Times]

LONDON — In a season of nightmare projections for Europe, this one could be the scariest: Greek leaves the euro currency union at the same time Spain’s banking system is collapsing.

In many ways, the market convulsion last week was a test run for those crises, as political deadlock in Greece and mounting fears over the health of Bankia, one of the largest consumer banks in Spain, converged. The credit ratings agency Moody’s Investors Service downgraded the entire Spanish banking sector Thursday.

As investors gird for another challenging week, they will be hoping European leaders in Brussels, if not Frankfurt where the European Central Bank is based, can finally start to map out an action plan. It is not clear that policy makers have many good options.

The money available to Europe within its main bailout fund, about €780 billion, or $997 billion, would not be enough to handle the twin calamities of a Greek euro exit and a Spanish banking implosion.

And despite recent statements from Germany and from leaders of the Group of 8 industrialized nations meeting in the United States over the weekend to encourage economic growth in the euro zone, the European tax-paying public may have little desire to continue financing the debt disasters of other countries.

“When you have Greece and Spain happening at the same time, the problem becomes exponential and very, very dangerous,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “So far, the policy has been to buy time and build a firewall — but that just makes the cost bigger. There is just no good ending here.”