At their summit meeting Friday in Copenhagen, the leaders of the eurozone countries agreed to increase their lending commitments by $267 billion to a grand total of just a little short of $1 trillion.
In fact, the new money is almost wholly accounted for by payments already made to Greece, Ireland and Portugal. And there are existing commitments to those three countries for another $250 billion. These are known problems, even though they are likely to get worse. The Greek finance minister said over the weekend that he couldn't rule out a third rescue for Greece even after its last default. Ireland and Portugal are still deep in recession and may well need more support.
The big unknown problem is Spain, where a general strike last week marked the government's latest austerity budget. It involved spending cuts of $36 million. This fell short by more than $10 billion of the sums required to reduce the budget deficit to the level agreed with the other eurozone partners. With a budget deficit last year of more than 8 percent of gross domestic product, Spain is supposed to cut that to just more than 5 percent this year and to 3 percent next year.
This might just be possible, were Spain's European partners and the rest of the world booming and were the Madrid government in charge of the finances.
But the rest of Europe is drifting into recession and close to half of Spain's public spending is in the hands of regional governments who are less committed to the austerity strategy than Madrid. And with youth unemployment hitting 52 percent, they have a point in asking just how much more austerity Spain can bear.
Daniel Gros, director of the prestigious Center for European Policy Studies, is an editor of International Finance and a former adviser to the European Commission's economics department. He is one of the most respected economists in Europe and he calculates that Spain will need $800 billion in refinancing over the next four years. If Italy needs help, as seems likely, it will need another $1.47 trillion in refinancing over the same period.
The European Stability Mechanism may not be enough.
"An ESM of ($667 billion) would barely be able to cope with GIP (Greece, Ireland and Portugal) should the programs not work out as planned and should the markets remain closed for these countries for another couple of years. Neither of these hypotheses seems far-fetched," Gros wrote in a commentary published over the weekend. "Given that the ESM could already reach its limits by helping the GIP alone, it seems clear that it would not be able to provide substantial support for Spain and Italy."
That European firewall is starting to look rather flimsy.
There is, of course, a second firewall, of $1.33 trillion, that has been erected by the European Central Bank over the past four month. In December and again last month the ECB made two massive loans to European commercial banks. The loans totaled more than $1.33 trillion and were very generous, charging only 1 percent in interest over a 3-year term.
The loans were intended to stabilize the European banking system, which was seizing up last December as banks refused to lend to one another and the U.S. money markets began withdrawing funds from Europe. In this it succeeded. The loans were also meant to enable the banks to help ease the euro crisis by buying up the debt of troubled countries like Spain and Italy.
This was an offer the banks could hardly refuse, when they could borrow money from the ECM at 1 percent and get more than 5 percent interest on their purchases of Spanish and Italian bonds. As a result, the interest rates on those government bonds fell and Italy can now borrow at not much more than 2 percent (which still leaves the banks with a nice little earner). But Spain's bonds are back to more than 5 percent, which suggests the markets doubt that Spain is out of trouble.
Moreover, as London School of Economics Professor Paul De Grauwe notes: "The banks channeled only a fraction of the liquidity they obtained from the ECB into the government bond markets. As a result, the ECB had to pour much more liquidity into the system than if it had decided to intervene itself in the government bond markets. If the banks used only half of the liquidity to buy government bonds, the ECB had to create two euros to make sure that one euro would find its way into the sovereign bond market."
This crisis isn't over. And since the European governments and the central banks are running out of fiscal ammunition, it may not even have really begun.