Greek Fire, Part 54

After burning low for most of March, April has seen the Greek Fire explode to become The Pain In Spain as Spanish bond spreads are rapidly approaching record numbers on crippling unemployment and a hollowed-out bank sector.

Spanish 10-year yields were 12 basis points higher at 5.84 percent, after rising around 30 bps on Wednesday. The yield differential over Bunds, at 411 bps, was its widest since late November, before the European Central Bank flooded the banking system with a trillion euros of three-year cash.

"There's been a lot of negative news on Spain over a sustained period of time but market sentiment was being buoyed by strong auction results until yesterday," said Rabobank rate strategist Lyn Graham-Taylor.

"It's quite a dangerous time and if the market starts to panic then the sky's the limit (for borrowing costs), although you may see some policy action come into play."

The Spanish/German yield spread was around 475 bps in November, even with the ECB buying bonds in the secondary market, a programme that has been mostly dormant this year.

ECB President Mario Draghi said on Wednesday that any talk of a withdrawal of the exceptional crisis-fighting measures would be premature.

Equivalent Italian yields, which are being dragged higher in tandem with Spain, were up 13 basis points at 5.52 percent. Shorter-dated paper in both countries underperformed.

"It looked like we were over the worst of it with the three-year (ECB funding operation) and Greece (debt restructuring) out of the way ... but now with the focus on Spain and Portugal we're looking at a different kettle of fish," a trader said.

Same kettle.  Same fish.  Only they stink worse now.  The Greek Fire just burns and burns, and while you might put it out temporarily in one EU country, it simply pops up and reignites in another one of the PIIGS countries like flaming whack-a-mole.  The hope that Europe had settled down and gotten things under control was just that: hope.

I said six weeks ago agreeing with Felix Salmon that the EU had bought itself several months.  It looks like the EU won't even get two months at this rate before having to intervene in Spain, Italy, and Portugal.  Only this time, there won't be any money to do it with.

European debt crisis?  Never went away, folks.  It's still the biggest economic story of 2012 and the economy here depends entirely on what happens in the EU over the next few weeks.

Strap in.  Gonna get ugly.