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Spain Bailout Made Crisis Worse, JPMorgan's Morris Says

Europe’s decision to provide Spain with as much as 100 billion euros ($125 billion) to rescue its banks has deepened the currency bloc’s crisis as it undermines confidence in the government’s ability to finance itself, JPMorgan Chase & Co. Strategist Daniel Morris said.

“When they went for the bailout, in some way you made it worse,” Morris said in an interview in Stockholm today. “Because if they couldn’t come up with the 100 billion euros for the banks, where are they going to come up with the 300 billion euros that they need over the next few years for their own funding?”

Since Spain on June 9 became the fourth euro nation to seek a bailout, its borrowing costs have soared. The country’s 10-year bond yield reached a euro-area record yesterday of 6.834 percent, signaling investors doubt the rescue package will solve Spain’s woes. Prime Minister Mariano Rajoy, who as recently as May 28 said he wouldn’t seek a bailout, described the deal as a credit line for lenders with no fiscal austerity strings attached.

Spanish authorities have “put themselves in this position where they almost have to bite the bullet and accept the interest rates,” Morris said. “If they go for the full bailout, you won’t have any more money left at that point and we know Greece needs more money under even the best scenario, let alone if Portugal or Ireland do as well.”

Inflame Anxiety

A full Spanish bailout would inflame anxiety over Italy’s health, Morris said. Italy’s 10-year borrowing costs were little changed today at 6.17 percent today, compared with 5.77 percent before Spain announced its rescue deal.

The fate of the euro ultimately hinges on the outcome of Greek elections on June 17, as speculation mounts that a victory for anti-austerity parties would trigger an exit from the currency bloc, Morris said. He places the probability of such an event at 25 percent to 33 percent, he said.

JPMorgan’s main scenario is that Greece will stay in the euro and continue to “muddle through” the crisis, Morris said.

“Fundamentally, for all these countries in Europe, they have to find ways to get the economies to grow faster and it really does come back to structural reform,” he said. “There is no way around it.”

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