Forget the bailout: the euro rate rise could finish off southern Europe

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Forget the bailout: the euro rate rise could finish off southern Europe

Portugal's request for a bailout from its European partners may have been the most visible symptom of the crisis in the eurozone, but the decision taken in Frankfurt to press ahead with an interest rate rise could have a far more corrosive impact on the euro's long-term future.

Analysis by City consultancy Fathom, obtained exclusively by the Observer, shows that because the interest rates on the bailouts provided to Greece and Ireland track the European Central Bank's lending rate, a series of increases could push these countries – and Portugal – into default.

"If the ECB continues to tighten policy, the impact is clear: default is more or less inevitable," says Fathom director Danny Gabay. "Greece is clearly on an unsustainable path."

Fathom also warns that Spain remains vulnerable, despite Madrid insisting last week that its economy is much healthier than Portugal's and its debts are much more manageable. Spanish banks must roll over debts worth more than 5% of GDP this year, and more than 9% in 2012, in addition to the government's financing needs. A two-point increase in the interest Madrid pays in the bond markets – much of which could come from the ECB, even without a further loss of confidence from bond investors – would, on Fathom's calculations, force Spain into a fiscal crisis.

http://www.guardian.co.uk/business/2011/apr/10/ecb-bailout-interest-rate-rise