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20 days until Spanish collapse?

(MoneyWatch) The countdown to Spain being unable to pay its bills started Monday, when its 10-year-bond yields hit 7 percent. If recent history is any guide that means there may be only 20 days to do something that will prevent Spain from needing international help. Such a move might devastate the world economy.

Stopping the clock won't be easy.

After Greece, Portugal and Ireland saw their 10-year bond rates go over 7 percent they lasted an average of 22 days before asking for international help. Portugal survived for a full month, Ireland 22 days and Greece 16 days before sending up the white flag. In all three cases the governments were no longer able to afford to borrow money needed to keep the government functioning once the amount of interest they would have to pay to borrow money for 10 years exceeded 7 percent. On Wednesday, the Spanish bonds opened at 7.04 percent. (According to the Associated Press, the rate has since eased a bit to 6.86 percent.)

While no one knows for certain what may happen, so far the EU leadership has provided few indications they have a solution. The G-20 Summit ended without any substantive plans being put forward. After the meetings ended yesterday all Treasury Secretary Timothy Geithner said was, "We're encouraged by what we heard from the European leaders today and by the broad focus around the world we're seeing to the need to strengthen economic growth."

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The only thing more specific than that was a report yesterday of the German government being "poised" to OK having the EU's bailout fund buy bonds directly from governments. The British newspaper The Guardian said Chancellor Angela Merkel was on the verge of approving a plan which would allow the European Stability Mechanism (ESM) to "buy up the bonds of crisis-hit governments in a desperate effort to drive down borrowing costs for Spain and Italy and prevent the single currency from imploding." This would make all the EU nations which could afford to contribute to the ESM owners of Spanish and Italian bonds.

Even if the report is true, there are many significant problems which would have to be resolved before it could happen. For one, the Treaty of Lisbon, which created the European Union, explicitly says that neither the EU nor its member states will ever be made liable for the debts of another member nation. Even if that were to happen, given Europe's economic condition, it is very unlikely that the already-hurting EU members would be able to provide enough money to do this.

So for now the clock is still ticking.

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