Political leaders should be ready to provide a further bail-out for Portugal within the next year, Europe's economic and financial affairs commissioner Olli Rehn has warned.
Mr Rehn said Lisbon, which has received a €78bn (£64.5bn) rescue package, is likely to need more public support before it can return to the bond markets next year. "From the European Union side, it would be wise to be prepared. Some kind of bridge needs to be built when Portugal returns to the markets," he said.
The warning came amid rising fears over the stability of Spain and Italy. Mario Draghi, president of the European Central Bank (ECB), said "sinner states" must execute their austerity reforms to reassure the rattled markets....
"Markets are asking these governments to deliver," he said....
For those who don't remember, the ECB's long term refinancing operation was designed to address the issue of bank funding liquidity.
It was not designed to handle the issue of bank solvency.
It is the solvency problem that has re-emerged as Eurozone governments do not have the ability to access enough capital to both pursue both expansionary economic policies and to recapitalize their banks.
Proponents of austerity would like the scarce funds to go into the banks.
Proponents of expansionary economic policies would like the scarce funds to go into the real economy to, among other uses, create jobs.
[For new readers, your humble blogger supports the use of scarce funds for expansionary economic policies.
By design, banks are there to protect main street from the losses on the excesses in the financial system. Because of government deposit guarantees and access to central bank liquidity, banks can operate for years with negative book capital. As a result, banks can absorb these losses and do not need to be recapitalized.]
Although politicians and central bankers have praised Madrid for passing tough austerity measures, global traders are concerned that the targets may be out of the government's reach....
The Spanish finance minister, Luis de Guindos, acknowledged that clinging on to market confidence was the most important factor for Madrid. He told Reuters: "The main negative effect, the main risk for the Spanish economy, is the perception that public accounts are not sustainable...Market confidence is a function of disclosure of all the useful, relevant information in an appropriate, timely manner.
Confidence occurs when market participants use this information to independently assess the risk of and value each security. Confidence reflects the simple fact that participants trust their own analysis.
Confidence is lost when market participants perceive that they are not getting all of the useful, relevant information.
In Spain's case, this information is directly related to what the true condition of the Spanish banking system is.
If Spain wants to retain market confidence, it will require its banks to provide ultra transparency and disclose on an ongoing basis their current asset, liability and off balance sheet exposure details. With this data, market participants can assess the true condition of the Spanish banking system.
More importantly, with disclosure of this data, there is no longer a need to prop up zombie borrowers. As a result, Spanish banks can clear out their troubled exposures while at the same time Spain maintains market confidence.
Meanwhile, the precarious state of Europe's banks last year was laid bare by the European Banking Authority, which said they would have had to have raised €242bn to achieve the capital ratios demanded by the new Basel III rules.
The regulator said had the incoming rules been in place last June, Europe's top 48 banks would have fallen woefully short of 7pc assets required.