After Spain asked European neighbors for help rescuing its insolvent banks, the chatter in the troubled Eurozone turned to speculating about whether Italy would be the next member to ask for a bailout.
It was not because Italy's balance sheets are as dire as Spain's or its debt levels as strangling as in Greece. It was because the bickering and politicking among the 17 Eurozone nations has created a crisis of confidence in the currency's future that has spooked the markets.
Economic analysts say the latest crises afflicting the euro could be brought to an end and new ones averted if the countries would collectively guarantee the bonds sold by national governments and create a banking union to coordinate the fiscal policies and debt management of the member states.
The weekend announcement of a Eurozone agreement to provide Spain with as much as $125 billion to recapitalize its banks failed to calm investors' fears for the future of the euro. Borrowing costs dipped for the most indebted countries in early trading Monday but climbed back by the end of the day close to the nearly 7% annual rate that drove Ireland, Portugal and Greece to seek bailouts.
The euro dropped against the U.S. dollar to just under $1.25, a more than 4% tumble over the last six months. Stock prices also fell in many global markets, including a 143-point drop in the Dow Jones Industrial Average.
"It's easy to lose the confidence of the markets, particularly if you're not doing what you need to fix the problem," said Douglas J. Elliott, an economics fellow at the Brookings Institution and a former investment banker.
Elliott said the collective Eurozone economy is at least as strong as that of the United States and the structural reforms needed to more efficiently manage it are obvious and technically doable. But political pressures are being felt differently among the member states.
Issuing new Eurobonds backed by the whole Eurozone would require the more robust economies, like Germany's, to take on higher interest rates for their own borrowing and provide guarantees that any bad debts of weaker euro-users would be covered.
Elliott said help for Spain is a good step, but he fears the euro crisis is likely to get worse before the countries using the currency come to a consensus on how to jointly tackle their debt and credit problems.
"Before Germany is going to give more, they will want to see power flowing to Brussels, to make sure Spain and Italy and others don’t dig themselves deeper holes in the future," Elliott said of the need to cede national authority over fiscal policy to European Union institutions in the Belgian capital. "Europe is walking through a minefield and there's a long way to go before they get to the other side."
The results could be explosive Sunday when Greeks go to the polls for a second attempt to seat a Parliament and government after an inconclusive election May 6. A fiery leftist who finished second in the vote a month ago has vowed to scrap tough debt-reduction measures promised in exchange for more than $300 billion in bailout funds from European colleagues.
Many observers see the campaign promises of Alexis Tsipras, the 37-year-old leader of the radical left Syriza party, as an attempt to blackmail Eurozone leaders into easing the Greeks' reform and repayment obligations in exchange for staying in the currency union. If Greece pulls out, the cost of servicing debt in other troubled economies could soar, possibly driving them to drop the euro, too.
Leaders of more centrist political parties in Greece have condemned Tsipras for what they see as dangerous pandering for votes by telling Greeks they can abandon the bailout terms yet still keep the euro. But some analysts think Tsipras' strategy might at least elicit some concessions on the timetable for budget cuts and meeting deficit-reduction targets.
"The Europeans are going to be desperate to negotiate their way out of any threat of contagion," said Uri Dadush, a former international trade director at the World Bank who heads the global economics program at the Carnegie Endowment for International Peace. "I would be astonished if the outcome was not some dilution of the conditions -- not huge, but enough for Syriza to say to voters 'look what we got for you.'"
Even if a Greek pullout can be averted and Spain manages its banking crisis, those problems are only the latest symptoms of more fundamental flaws in the single currency, said Dadush. Europe will lurch from crisis to crisis until and unless it makes obvious its commitment "with as much fanfare as possible" to a banking union and jointly backed Eurobonds in which investors would have greater faith.
As markets and analysts struggled to factor in the Spanish bank bailout, another Eurozone nation, Cyprus, disclosed that it may be next in line. Cypriot Finance Minister Vassos Shiarly said in Nicosia that the island state's need for bank recapitalization was "urgent" because of its exposure to the Greek financial crisis.
Contagion, or fear of it, was blamed for financial markets turning on Italy. The country's 2 trillion euro debt, or $2.5 trillion, is twice that of Spain. Rome also has to pay nearly as high interest as Madrid on the bonds it sells to service that debt. But Italy has managed a cash surplus despite the heavy debt load and is expected to have its deficit reduced to the 3% mandated by Eurozone colleagues by the end of the year.
In an apparent effort to ease market worries about Italy, the European Union commissioner for economic matters, Olli Rehn, told journalists Monday that Italy's government was taking the right steps to address its financial ills.
“I do not want to start painting more negative scenarios on the wall,” Rehn said during a news conference in Strasbourg, France. “We all know that Italy has some serious imbalances, but the country is in the process of correcting those. Moreover, its fiscal policy is on track."
Elliott, nevertheless, said he worries about the longevity of Italy's technocratic government under Prime Minister Mario Monti.
"At some point the politicians are going to want their toys back. Most politicians are waiting for the Monti government to take the harsh measures that are necessary then get out of the way," he said.
It will take years, analysts contend, for belt-tightening and reforms to pare Italy's debt -- time the caretaker government may not have before political parties insist on new elections and revert to the bad budgetary habits that have mired the country in debt for decades.
-- Carol J. Williams
Photo: Brokers at the Madrid stock exchange on Monday, when the market briefly rallied on news of a Eurozone bailout of Spanish banks but then fell on spreading worries about the prospects for politicians crafting a united strategy for stabilizing the common currency. Credit: Daniel Ochoa del Olza/Associated Press