I also posted the question in krugman's blog.. but I trust your insight more... seriously.

Any idea?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

What they can do long term is one of the following:

a) push for the right mechanisms or institutions to deal with such crisis (e.g. enact an European Treasury);

b) close the deficit and adhere to the Germanic budget school.

They can also try to do both.

luis_de_sousa@mastodon.social

And for someone to bang a few heads together in the Eurogroup to get a coordinated fiscal policy.

Otherwise, we'll end up with Germany standing on top of a pile of defaulted bonds from the rest of the Eurozone.

The brainless should not be in banking -- Willem Buiter

Spain and Portugal can't be left alone because of those stakes.

When you read about coordinated European policy, all I hear is a dismantling of the current social system.

Spain had its credit rating cut one step by Standard & Poor's to AA, putting it on a par with Slovenia, as contagion from Greece's debt crisis spreads through the euro region.

S&P said in a statement today that the outlook on Spain is negative, reflecting the chance of a possible further downgrade if the "budgetary position underperforms to a greater extent than we currently anticipate." Spain was last cut by S&P in January 2009.

The risk premium investors demand to hold Spanish bonds surged to the highest in more than a year today and the price of insuring Spanish bonds against default reached a record as doubts about Greece's ability to pay its debt spilled over into Spanish and Portuguese markets.

How would it be done? How would someone use the window discount of the ECB for banks to make this deal? Or would some kind of guarantee be enough?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

Are they betting against Spain or Portugal even? or are they sitting up all night with other smart people trying to figure out how to keep clean the good name of the country that they get legitimacy from?

In 2007, Santander held its 150th anniversary as the world's 12th largest bank by market cap, the 7th in terms of profit and the bank with the largest retail network in the western world, with 10,852 branches.

The Santander Group is the fourth largest bank in the world by profits and eighth by stock market capitalisation. In 2009, its net ordinary profits were over EUR 8.9 billion, 1% more than the previous year, and it distributed more than EUR 4.9 billion in dividends to shareholders. With these figures, the Group achieved the target set at the Annual General Meeting of Shareholders held on June 19th 2009 to maintain its profits and the dividend payout.

Frank Delaney ~ Ireland

Representatives of the IMF and the EU [and the ratings agencies?], like postmodern colonial administrators, are currently in Athens imposing further austerity to accompany the loan. Deep cuts in the public sector, reduction of civil servants' salaries and pensions of up to 30%, a VAT hike and extensive redundancies had already been accepted by the Papandreou government.

The new demands will decimate the public sector, undermine the national health service, privatise the remaining utilities and extend salary cuts to the private sector, destroying hard won employment rights.

http://www.guardian.co.uk/commentisfree/2010/apr/27/greece-imf-eu-welfare-state

fairleft

And in the case that Greece is bailed out, and total destruction of aggregate demand is demanded (Am I not cute with this retruecanos?), what should Portugal and Spain do when they request the same thing from two economies which are very close to recovery if they are only left alone?

It's not Greece that would be bailed out.  It's the Greek state's creditors that would benefit from EU generosity in that regard.  Greece and its citizens (at least those who aren't also among its creditors), would be bailed out if the Greek state simply defaulted on their loans, as many states have done in the past and will continue to do. The issue before the EU is whether EU citizens, as members of a group, should be forced to divert their resources to the people who lent money to Greece instead of just transferring the a portion of Greece's debt -- and the resources which it has claims for -- to the Greek state.  

A fair amount of research has been done on what happens to states that default on their debt, and the answer is: not much.  As economists William Buiter, Rogoff, and Reinhardt have said, it takes 3-5 years for a defaulting country to have their debt securities listed as investment grade again.  Markets always forget and forget quickly.

However, in the 3-5 year wait until borrowing opens up again, fiscal austerity can be quite severe for some people in defaulting countries, so are there alternatives to "TINA?" One alternative that hasn't gotten much play is frequently used by US state and local governments and could conceivably be employed by Greece, Portugal, Spain, or anyone else, but preferably in an improved and expanded way: Revenue Anticipation Warrants or Notes.  

As employed in the US, they are basically IOUs, and California, somewhat controversially, employed them last year to continue government functions when it had no cash on hand to pay anyone. It used them previously in the 1980's too, and are frequently used by many local governments throughout the US. They are interest bearing securities (for CA rated A-, investment grade) that mature within a short time period, but would be greatly improved if they were issued with no interest commitment or maturity date.  Rather their value would be guaranteed by being able to use them to pay taxes due to the state.  That is, they could become credit issues instead of debt issues as they are currently used in the US.

Such a policy device could provide any EMU country a means of regaining the power to implement a monetary policy to escape debt, and used responsibly (which means only in intermittent surprises, not ongoing means of financing government) such a device could result in sufficient net transfers of sovereign wealth from creditors to the state such that state consumption and social welfare is maintained and smoothed while fiscal adjustments are made to a more financially sustainable path.

What should Spain do when the refinancing of its debt can not find any willing buyer?

Demand ECB to buy it. What Spain needs is a nice 10% inflation that will destroy household debts and rise the value of wages. Then tax land hard to keep property prices low and domestic demand high.

In 2009, the government deficit1 and government debt1 of both the euro area2 (EA16) and the EU27 increased compared with 2008, while GDP fell. In the euro area the government deficit to GDP ratio increased from 2.0% in 20083 to 6.3% in 2009, and in the EU27 from 2.3% to 6.8%. In the euro area the government debt to GDP ratio increased from 69.4% at the end of 2008 to 78.7% at the end of 2009, and in the EU27 from 61.6% to 73.6%.
...
In 2009 the largest government deficits in percentage of GDP were recorded by Ireland (-14.3%), Greece (-13.6%) the United Kingdom (-11.5%), Spain (-11.2%), Portugal (-9.4%), Latvia (-9.0%), Lithuania (-8.9%), Romania (-8.3%), France (-7.5%) and Poland (-7.1%). No Member State registered a government surplus in 2009. The lowest deficits were recorded by Sweden (-0.5%), Luxembourg (-0.7%) and Estonia (-1.7%). In all, 25 Member States recorded a worsening in their government balance relative to GDP in 2009 compared with 2008, and two (Estonia and Malta) an improvement.

At the end of 2009, the lowest ratios of government debt to GDP were recorded in Estonia (7.2%), Luxembourg (14.5%), Bulgaria (14.8%), Romania (23.7%), Lithuania (29.3%) and the Czech Republic (35.4%). Twelve Member States had government debt ratios higher than 60% of GDP in 2009: Italy (115.8%), Greece (115.1%), Belgium (96.7%), Hungary (78.3%), France (77.6%), Portugal (76.8%), Germany (73.2%), Malta (69.1%), the United Kingdom (68.1%), Austria (66.5%), Ireland (64.0%) and the Netherlands (60.9%).

In 2009, government expenditure in the euro area was equivalent to 50.7% of GDP and government revenue to 44.4%. The figures for the EU27 were 50.7% and 44.0% respectively. In both zones, the government expenditure ratio increased between 2008 and 2009, while the government revenue ratio decreased.