Spanish bond yields are spiking with no obvious reason to believe they will come down anytime soon. They briefly hit 6.5%. But they are now down somewhat to 6.29% since then. That puts the Spanish-German 10-year spread at an all time high.
(Chart from Bloomberg)
With Italian yields also spiking and Greek banks losing 700 million euros of deposits a day, I think Europe is on the brink of something very big. As I wrote in January, we will have to see another crisis which threatens Italy or Spain before we get a more definitive policy response. Will it be a firm ECB backstop, Eurobonds, the rumored EuroTARP. It’s not clear at this point. But of those three the EuroTARP is the only one that has any policy traction right now. So if I had to bet, I’d bet on bank recaps.