Economic Outlook: A fix for Europe

Behind the impulse in Europe to form eurobonds or collectively insure bank deposits is the fear that Spain will require a very expensive fix -- and soon.

Estimates for a bailout of Spain's banks range as high as $620 billion, which would be a massive piece of the $867 billion Europe has been able to leverage for a financial rescue package, which will become available this summer.

That would leave little for any other rescues. Italy is looking at yields on 10-year government bonds, which are near the breaking point, the point when international loans become cheaper than participation in the bond market. Further, this gets more expensive every day.

Prime Minister Mariano Rajoy has said Spain is not going to need a bailout.

This sort of denial plays well where exactly?

With Spanish bonds losing value every day, the value of Spanish banks that gobbled up bonds with cheap European Central Bank loans is diminishing as we write. The longer Rajoy waits, the more his credibility erodes. On the other hand, no country is happy to eat in the kitchen with Greece, Ireland and Portugal, where the terms of international assistance have hobbled economic growth.

"We are a highly leveraged nation. What we need is a Europe-wide solution," said Santiago Valverde, a central bank research consultant and professor of economics at the University of Granada, as quoted by The New York Times.

The ECB's cheap loan program fueled a turnaround in Spain, where foreign investors held 40 percent of the country's bonds in March 2011, a figure that plummeted to 26 percent by March 2012.

That meant, if you could get out of Spain, that's what you did. Now the banking system that suffered the worst residential real estate collapse in Europe is saddled with bonds that have yields approaching 7 percent -- they were at 6.6 percent Wednesday.

Backing this up, currently, is a fund out of which a rescue of Spain would eat up 71 percent.

European Commission President Jose Manuel Barroso said this week that the EC would back proposals to create both a "banking union" and "eurobonds," proposals that will likely be met with little enthusiasm from Germany.

In international markets Thursday, the Nikkei 225 index in Japan lost 1.05 percent, while the Shanghai composite index in China fell 0.52 percent. The Hang Seng index in Hong Kong slipped 0.32 percent, while the Sensex in India lost 0.57 percent.

The S&P/ASX 200 in Australia gave up 0.44 percent.

In midday trading in Europe, the FTSE 100 index in Britain rose 0.29 percent, while the DAX 30 in Germany dropped 0.14 percent. The CAC 40 in France was flat, losing 0.09 percent, while the Stoxx Europe 600 shed 0.16 percent.