The European Union just can't seem to draw a line under the sovereign debt crisis that continues to stalk its southern states. And it is not just events that are undermining the efforts of the eurozone's leaders.
In isolation, setbacks such as Saturday's banking rescue in Spain — the news of which undid the gains from Friday's political commitments to greater fiscal co-ordination and austerity — should not be sufficient to trigger further market panics. But the bigger problem is that even now, the EU does not seem to understand the gravity of the crisis or the scale of the challenge.
The most pressing issue is that increasingly few people believe that Greece can now avoid a default on its debt; whatever the support mechanisms put in place to ease it through its current liquidity difficulties, the threat to its solvency is too grave, in the end, to be headed off. And for as long as Brussels does not face up to this reality, the perception is that EU officials do not get it. The credibility of their pronouncements on other aspects of the crisis is thus damaged.
For this reason, the sooner the EU starts explaining how it might deal with a default — rather than insisting that there won't be one — the better. A report issued by Royal Bank of Scotland economists yesterday will only add to the pressure. It estimates that the exposure of foreign institutions to Greek sovereign debt is some E338bn (£289bn), far more than previous estimates, which have focused only on banking exposure.
The same RBS report also warns that foreign exposure to Spanish debt comes in at a staggering E1,500bn, while Portugal accounts for another E333bn.
These figures may go some way towards explaining why the EU is so determined not to countenance the possibility of defaults. The size and reach of exposure to European sovereign debt across the financial system of the globe suggests that the fall-out from this crisis may be much more damaging than initially assumed (not that a financial crisis among European banks, plunging us back into recession, is a trivial matter).
Still, denying the reality of a likely Greek default leaves eurozone leaders looking complacent at best, and incompetent at worst. It only adds to the loss of confidence in countries other than Greece which, in theory, are in a better position to avoid debt restructuring, hastening their demise too.
Brussels needs to begin talking about mitigating a Greek restructuring. The E750bn bailout fund could, for example, be redirected towards those directly in the firing line of a default, in an attempt to limit contagion. Denying the problem will only make it worse.