The 85-billion-Euro bailout of Ireland could not convince markets that the crisis would not spread to other indebted Eurozone countries. On Tuesday, the debt costs of Portugal, Spain, and Belgium touched all-time hit their highest levels in the Euro’s 12-year history. Late on Tuesday the S&P ratings agency placed Portugal on a credit watch over its huge debts, signalling that it would be the next country to ask for joint aid from the EU and IMF, as per BBC news.
Portugal’s central bank warned about the risks being faced by its banks. A failure of the Portugal government to consolidate public finances may lead to Portugal's banks facing intolerable risks, the central bank warns. France has already come forward saying it would help support Portugal and Spain if the need arises. Financial officials in France and Germany accused investors of acting irrationally to the threat of financial contagion.
The yield on Spain’s 10-year bonds reached to 5.7% on Tuesday, a record difference of 3.05% compared with Germany’s 10-year bond. The bond spread for Italy’s 10-year bond was at 2.1 percent over Germany’s bonds and the Irish bond yield stood at 9.53%; the Portuguese yield stood at 7.05% for 10-year bonds. However, the yields for government bonds of these countries were reportedly to be lowered on Wednesday on speculation that the European Central Bank would take extra measures to save the Euro from falling, Reuters reported.
Reuters quoted a Citigroup economist as saying that the Eurozone crisis could soon spread to the US and Japan. The officials of ECB, EU, and EC are rushing to give statements to inject confidence among investors on Eurozone stability. Some analysts are expecting ECB to increase its bond purchase programme from Eurozone region governments, while some ECB officials are opposing such a move. Germany’s Chancellor Angela Merkel is one such, sceptical of providing further funds to indebted countries as that would force Germans to bear the lion's share of the bailout programmes.
But Germany is increasingly facing a dilemma: whether to do more to save the monetary union or to leave it to disintegrate. On the other hand, they are forgetting the important fact that decreasing labour costs would lead to decreasing purchasing capacity among the people, which is the basic factor in increases or decreases in consumer spending. Thus, the measures taken by the governments to increase the productivity of capital are ultimately leading to a decrease in consumer spending, which pushes down the growth rate. This is the basic contradiction inherent in the capitalist productive system that forces unequal income distribution in society.