The European sovereign debt crisis has mostly disappeared from the headlines in recent weeks, but events in Spain may propel it back into the news cycle. In recent days, Spanish bond yields have climbed sharply while the country's stock market has dived. The all too familiar question is whether a government facing a shrinking economy and street protests will be able to slash spending enough to reassure markets about the country's debt. The government, set to announce its austerity budget today, is putting on a brave face. Via Reuters:
The Spanish government prepared to approve on Friday a new austerity budget that hundreds of thousands protested against this week in sometimes violent demonstrations, but which Madrid says is vital to avoid financial ruin.
The Cabinet was due to approve €30 billion ($40 billion) in spending cuts and tax hikes in the draft 2012 budget — another taste of painful reforms that fueled popular outrage and culminated in clashes between protesters and police in major cities on Thursday.
"Spain is going to stop being a problem, especially for the Spanish people but also for the European Union," Economy Minister Luis de Guindos spoke as he entered an informal meeting of eurozone colleagues in Copenhagen.
Meanwhile, Eurozone ministers have apparently agreed to temporarily pool their separate bailout funds to create a more formidable firewall. The markets have reacted well to that news, but observers are mixed on whether even the combined funds would be enough to cope with a Spanish meltdown.