Eurozone's woes continue as nothing has been done about contagion

ΠΗΓΗ: Guardian

Nils Pratley

Meanwhile, last Thursday's solution to the eurozone's woes looks weaker by the day. In the fight against contagion, nothing has been achieved. The yield on 10-year Spanish bonds popped back above 6% and Italian 10-year yields stand at 5.66%. Such rates, if sustained for long periods, are simply unaffordable. Unsurprisingly, bank shares across Europe were also whacked yesterday.

The problem is twofold. First, the politicians didn't get to grips with the size of Greece's debt problems. After a round of modest haircuts for private-sector creditors and a reduction in the rate on the interest rate charged on the bail-out loans, the country's debt-to-GDP ratio should no longer hit 170% soon. But the revised figure – maybe 130% – still looks too high to allow Greece to recover. Its economy is still too uncompetitive and you have to be an extreme optimist to believe tax receipts will arrive when they are due.

So a third Greek bailout looks like only a matter of time. Get ready for more bitter rows over how the pain should be distributed between holders of Greek bonds and the taxpayers of other eurozone countries. That is no way to encourage companies to invest or consumers to spend – but it is the way to try the patience of German taxpayers.

The second problem is the design of the European financial stability facility – the rescue fund that is to be the first line of defence against speculative attacks. But how would Italy and Spain be defended in practice? The EFSF has been handed powers to intervene but no new cash. A fighting fund would have to be raised by passing the hat round member states – a challenge that looks a tall order today.

Eurozone leaders, one assumes, believed they were buying themselves some space to address this defect. To judge by yesterday's bond prices, they have less time than they thought.