Daily: More on the unravelling of Europe’s summit agreement

By Edward Harrison On Jul 11, 2012

The European Summit which saw an agreement in principle to recapitalise Spain’s weakest banks has unravelled in an alarming way. This setback for the Spanish economy and the Spanish government will mean a loss of market funding for Spain. The EU will then be faced with options of whether to monetise Spain’s debt or or let it default since Spain is too big to bail out.

Ambrose Evans-Pritchard claims Merkel learned that she broke German law on the ESM rescue and that this is the reason that she and her finance minister have backpedalled on the deal they struck two weeks ago. But, of course, there has a been a vocal outcry against the deal in Germany as well because Merkel was rightly seen as having capitulated, making her look weak. No matter what the reason is, the effect is clear: Spain is again on the hook for not just sovereign but also bank and potentially regional debts. No one in his right mind would buy any Spanish sovereign debt under these conditions unless they were compensated with a high yield.

In my mind, this is a case of snatching defeat from the jaws of victory no matter how tactically brilliant Merkel appears. Europe will pay a high economic price for this blunder. it is going to get much worse from here.