European officials are scrambling to assure their support for Spain, even as they warn Greece is falling well short of the austerity commitments required for rescue money to keep flowing to Athens.
The promises of euro zone leaders have yet to translate into concrete action on the Spanish front, delaying critical bank aid, spooking the markets and raising fears that Madrid will soon need a full-scale bailout, something the stronger countries like Germany are eager to avoid because of the rising risks to their own fiscal credibility.
For the same reason, Greece now appears closer to having to leave the 17-member monetary union given its failure to meet its pledges.
The sinking fortunes of both countries and the deteriorating health of core euro zone members have triggered alarm bells in global markets over the seeming inability of the Europeans to contain a spreading crisis that threatens to tear the currency union apart.
Moody's Investors Service sent up warning flags Monday about the risks to fiscally sounder euro zone countries posed by the possible need for bailouts for Spain and Italy, as well as the financial shock waves that would flow from a Greek exit.
German officials quickly dismissed the rating agency's concerns, which nevertheless seem certain to strengthen their resolve to stand firm on their tough stance on Greece and to take a tough line on other troubled members of the club.
As watchdogs from the rescue troika for Greece – the IMF, ECB and European Commission – arrived Tuesday in Athens to assess progress on the promised austerity measures, Greek Prime Minister Antonis Samaras lashed out at European politicians who have dismissed his fledgling government's efforts at reform.
"We're doing everything we can to put the country back on its feet, and they're doing everything they can to ensure we fail," Mr. Samaras told a gathering of parliamentarians from his New Democracy party. Spain, Italy and France have all warned that delays in implementing wide-ranging financial reforms and initiatives designed to spur economic growth – including a euro zone-wide bank regulator – approved at an emergency European Union summit at the end of June are deepening market unrest and driving up Spanish and Italian borrowing costs to unsustainable levels.
"Spain, France and Italy demand the immediate execution of the agreements," the Spanish foreign ministry said in a statement.
Leaders promised up to €100-billion ($123-billion) in aid for Spanish banks, but tied it to implementation of bank regulatory changes.
The intervention "is conditional on something that nobody thinks can be done any time soon, which is establishment of a functioning central supervisory mechanism," said Nicolas Véron, a visiting fellow at the Peterson Institute for International Economics in Washington and an expert on European banking policies.
French Foreign Minister Laurent Fabius warned in a television interview Tuesday that the EU may have to boost the size of its bailout funds and joined a Spanish call for intervention in the bond market by the ECB to reduce Madrid's borrowing costs.
But the ECB has so far refused to resume buying sovereign bonds in the secondary market to drive down yields, insisting that such purchases should be made by the bailout funds. Germany has opposed further ECB intervention or an expansion of the rescue funds.
A successful auction of €3-billion worth of three- and six-month Spanish treasury notes Tuesday showed that Madrid can still tap the short-term market, albeit at a near-record cost. The average yield on six-month paper climbed to 3.69 per cent from 3.24 a month earlier (and below 1 per cent as recently as March). And the benchmark 10-year bond continued its record-setting climb, edging past 7.62 per cent.