Spanish crisis pushes nation to brink of default

Coal miners arrive near the Spain's Industry Ministry after marching up Madrid's main north-south avenue on Wednesday July 11, 2012. Riot police fired rubber bullets Wednesday at Spanish coal miners protesting in the streets of Madrid over subsidy cuts they fear will jeopardize their meager livelihood. The miners' march into the capital was the culmination for some of a nearly three-week trek from the regions where they eke out a living. AP Photo/Emilio Morenatti

(MoneyWatch) Spanish borrowing costs are rising to new highs, increasing the odds that the country will be forced to default, according to analysts. And given the astronomical cost of rescuing Spain, they believe that a Spanish default could lead to the breakup of the EU.

"It's virtually impossible to rescue Spain," says Jeff Sica, founder and chief investment officer for SICA Wealth Management. "The ECB won't have the ability because of the amount of debt or interest involved. We have crossed the point of no return. The collapse of the EU is right around the corner."

Not only are yields on Spain's 10-year bonds over the critical 7 percent level and rising, but the 5-year bond is now close to that level as well. At mid-day Friday trading it was already at 6.8 percent. The Spanish government has already admitted that it is out of cash. Yesterday Budget Minister Cristobal Montero told Parliament, "There is no money in the public coffers."

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A rise in yields raises a government's borrowing costs, making it more expensive to repay debt and hindering economic growth. Surging interest rates have been a signature of the European debt crisis, with global investors demanding a bigger payoff to offset the perceived risk of holding sovereign debt. Portugal, Ireland and Greece all sought international bailouts within weeks of their 10-year notes hitting 7 percent.

Spain is Europe's fourth largest economy and the world's 14th largest economy in terms of GDP. By comparison, Greece's economy is ranked No. 41 in the world and roughly the size of that Spain's most prosperous region, Catalonia. The Spanish economy's size effectively makes it too big to bail out even if the EU, European Central Bank, and IMF were to combine all of their resources. Even if a bailout were affordable it is unlikely that any of the richer nations -- like Germany or Finland -- would be willing to bear the cost.

"For Germans to go along with a bailout it would mean their borrowing costs would become the same as Portugal's," says Mark Grant, managing director at Southwest Securities Inc. "They've run out of road."

Since the start of the financial crisis three years ago, EU officials have tried without success to find a solution to the problem. The answers most likely to succeed -- like issuing bonds guaranteed by several nations or creating a more integrated political and financial system - would take years to implement.

"They're not going to be able to muddle through or kick the can for very much longer. There's an endgame at some point in time and it seems to be getting closer and closer," says Brad Sorensen, director of market and sector analysis for Charles Schwab. "There are only two possibilities left: Either form a much closer fiscal union to mesh with monetary union or they break apart."

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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