This week, the yield, or interest rate, on 10-year Spanish bonds briefly reached 7 percent, a dreaded benchmark that led to massive bailouts for Greece, Ireland, and Portugal over the course of Europe's long-running debt crisis. Though European leaders have given Spain's banks a hefty bailout, they've been mum on their plans for Spain itself — while the world waits for the other shoe to drop. Adding a big dollop of anxiety to an already tense situation, Greek voters go to the polls this weekend, in an election that could determine whether Greece remains in the euro. Here, four burning questions about Spain and Europe's crisis:
1. Will Spain need a bailout?
Time will tell. While the 7 percent threshold spelled doom for Greece, Ireland, and Portugal, Italy's 10-year bond yields hit the ominous mark in November 2011, only to drop after the European Central Bank (ECB) intervened. Spain is no doubt hoping that markets will be forgiving, but a gloomier scenario might see the country forced to accept a bailout along with harsh austerity conditions that would likely further cripple its economy.
2. Can Europe afford to bail out Spain?
Bailing out Spain, the eurozone's fourth-largest economy, would be extremely expensive. An additional concern: A Spanish bailout could throw markets into a panic and cause yields for other debt-embattled countries to rise. Italy, the continent's third-largest economy, saw its 10-year yields rise above 6 percent this week, and there's no way Europe can afford to bail out both Spain and Italy.
3. So what can Europe do?
Eurozone leaders have already agreed to a $125 billion bailout of Spain's banks, but markets quickly brushed off the aid as inadequate. German Chancellor Angela Merkel remains opposed to proposals — such as issuing joint, pan-European bonds — that would require Germany to shoulder some of Spain's debt burden. That leaves the ECB. Spanish Prime Minister Mariano Rajoy has called on it to buy Spanish bonds directly, a move that would lower yields. But the ECB has so far resisted, over fears that central-bank intervention would reduce pressure on other countries to reform.
4. What happens if disaster strikes?
If the Greek elections and worries over Spain cause markets to seize up, ECB President Mario Draghi has suggested that the central bank would flood the market with money to head off a credit crunch. Meanwhile, central banks around the world, including the U.S. Federal Reserve, are also girding themselves for market volatility this weekend and are reportedly prepared to take coordinated action. The Bank of England, for one, has already unveiled a plan to unleash billions of dollars on to markets if the turmoil spreads.
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