When Contagion Isn't

The disease model of debt, so common in conversations about the European Debt Crisis just a few months ago, seems pretty much defunct these days. Spain, crippled by massive government intervention in their economy and dealing with the crash of their own housing bubble, is struggling to find lenders for their huge deficits.

A miserable Spanish bond auction Wednesday highlighted fraying investor confidence in the country's economy, with unemployment rampant, the debt burden climbing and the government's ambitious budget cuts likely to further crimp already weak growth.

Nowhere in the article does it mention firewalls or contagions. Instead, it's a pretty competent and straightforward analysis of the problem - the ECB has stopped printing Euros and buying bonds and now debt-saturated countries are in trouble.

The latest rise in yields could mark a crucial phase in the debt crisis. The ECB's liquidity operations helped ease tensions in the euro-zone periphery as domestic banks gorged on cheap funds to snap up higher-yielding bonds. With the impact of the LTROs now starting to fizzle out, it remains unclear where Spain and Italy will find continued demand for their bonds.

Note that if they balanced their budgets and all they had to do was service existing debt, these problems would be very, very small.

They'll get to that point whether they want to or not. We all will.

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