Spain is caught in a vicious downward spiral as the property crash accelerates, further undermining the banks and state finances. This in turn is drawing Italy into the fire and threatens to overwhelm the EU's rescue machinery.
"We must have a real circuit breaker," said Sondergaard. "The question is whether the ECB will now blink and go down the route of quantitative easing (QE)".
He said the ECB should slash interest rates by half a point to 0.5pc and "pre-commit" to half a trillion euros of QE over coming months, blanketing the Spanish and Italian bond markets.
Nomura said the ECB must act with overwhelming force rather than engaging in piecemeal bond purchases that fail to restore confidence and have the toxic side-effects of pushing existing bondholders down the credit ladder -- the dreaded effect of "subordination".
"The eurozone has the wrong policy mix across the board. Fiscal policy is too tight; monetary policy is too tight; and the tough regulation of the banks is coming at the wrong time. Together it is all pushing the eurozone to breaking point," he said.
Spanish premier Mariano Rajoy said in a private letter to EU leaders last week that the ECB is the only body with firepower and nimbleness able to contain the crisis at this point.
The pleas have so far fallen on deaf ears in Frankfurt where ECB hawks insist that any such intervention to help EMU's struggling debtors would reduce the pressure for root-and-branch reforms.
The bank said in its June report on Thursday that Spain must make further draconian cuts to meet its deficit target of 3pc of GDP next year. It enraged monetarists by denying yet again that the eurozone faces a serious monetary slowdown or "an abrupt and disorderly adjustment" for banks -- or a credit crunch in layman's language.
"It shows fantastic complacency. They are not complying with their own mandate," said Professor Tim Congdon from International Monetary Research. Critics say that all key measures of the eurozone money supply are now contracting, pushing the whole region into deeper slump. The ECB has missed its 4.5pc growth target for M3 `broad money" by a wide margin.
Mr Spiro said the fast-escalating crisis in Italy may force the ECB to act. Foreigners own half Italy's €2 trillion public debt and they are increasingly shocked by the failure of the EU authorities to halt contagion. "Foreigners haven't been buying Italian bonds, but most have not been selling either. The risk is that they will now start selling en masse," he said.
"Italian banks are under massive financial repression to buy the debt but they are running out of money. The ECB will have to act but it has lost so much credbility already that it will have to buy on a massive scale to make a scrap of difference."
The ECB has already bought over €200bn of Italian, Spanish, Greek, Irish, and Portuguese bonds, justifying it as necessary to ensure the proper "transmission" of monetary policy. The move caused a storm in Germany, prompting the resignation to both German members of the ECB board last year. A chorus of economists have exhorted the ECB to cap Spanish and Italian yields at 5pc or so by pledging unlimited intervention. Yet such a naked rescue of insolvent states would trigger legal challenges in the courts for breach of the EU's no-bailout clause.
Professor Paul De Graue from the London School of Economics said the bank should go ahead anyway and "let the lawyers argue about it for the next ten years."
There are no such constraints on outright QE or money printing by the ECB, in extremis. Monetarists say the bank should buy the bonds of all EMU states to lift the entire region and prevent debt-deflation taking hold in the South.
Fresh data yesterday shows how desperate the crisis is becoming in Spain. The property crash is accelerating. House prices fell at a 12.6pc rate in the first quarter of this year, compared to 11.2pc the quarter before, and 7.4pc in the quarter before that. Prices have fallen 26pc from their peak.
"Fundamentals point to a further 25pc decline," said Standard & Poor's in a report on Thursday. It may take another four years to clear a glut of one million homes left from the building boom.
Mrs Merkel chided the country gently yesterday for letting a "property bubble" spin out of control in the boom years. Her words prompted a furious reaction from Madrid.
Foreign minister Jose Manuel Garcia-Margallo said Spain itself was the victim, flooded with cheap capital from northern European banks. "It is true that Spain and some other countries lived beyond their means but that was because banks from the core made lots of money investing here," he said.
No finance limit forces Obama into fame game - Sydney Morning Herald
Illustration: Simon Letch
This morning, Australian time, the US President, Barack Obama, is due to attend a fund-raising dinner party at the New York home of movie stars Sarah Jessica Parker and Matthew Broderick. Co-hosted by the editor-in-chief of Vogue, Anna Wintour, the price of a ticket was a reported $80,000 a head. Not a good look for the President in the week the US Federal Reserve reported that average American wealth had plummeted to $77,300 in 2010 - down from $126,400 in 2007.
As the US economy is underperforming, unemployment is officially 8.2 per cent and confidence is, at best, wavering, this would not seem to be the time to be hanging out with high-wattage wealthy celebrities. But the President needs the money.
Obama and the now certain-to-be-anointed Republican candidate, Mitt Romney, have opted to not accept public financing for the 2012 presidential election campaign. Previously, candidates would raise money to boost their electoral fortunes before the party conventions, but after that would accept the benefits - and constraints - of public funding.
Now, after a Supreme Court decision that effectively deregulated campaign financing (undoing all those decades of hard work to reform what had arguably been a pretty corrupt system), the bar has been raised significantly.
More money is going to be needed. And there are now virtually no limits on how it is raised or spent.
This presidential election is, according to Obama's senior campaign strategist, David Axelrod, going ''to test the limits of what money can do in politics, because there's gonna be so much of it concentrated in so few states'', as he told New York magazine's John Heilemann earlier this month.
And Obama is now falling behind in the fund-raising stakes. Although at the end of March, when he had raised about US$197 million, he was way ahead of the then-frontrunner Republican contender Romney, who had just $87.5 million, the other Republicans have since coalesced behind Romney - and so have their donors.
Just this week, billionaire Nevada casino owner Sheldon Adelson, who had been backing Newt Gingrich, kicked in $10 million to Romney's Restore Our Future super-PAC (political action committee) and Forbes magazine reports he may well follow that with the $100 million he had promised Gingrich.
Last month, Romney raised $76.8 million to Obama's $60 million, and he is pulling ahead with the very wealthy.
Wall Street has spurned Obama, so far giving Romney $37.1 million and Obama only $4.8 million. Ominously, these sums include donations from 19 people who gave to Obama in 2008 but not this time. Forbes says 32 billionaires, or 8 per cent of their 400 rich list, have donated to Romney and more will follow.
So while Obama continues to pursue the grassroots online fund-raising that was so successful in 2008, for the really big bucks he is being forced to take his begging bowl to three different and potentially risky sources of funds: Hollywood, Silicon Valley and rich gays. No one in the know doubts that the President's decision to support gay marriage was made with an eye to the pink dollar. A few days after the decision, a Hollywood fund-raiser hosted by George Clooney and including high profile gay supporters, raised $15 million.
This strategy is risky because it requires Obama to be hanging out with the mega-rich at a time when his political message is directed to economically distressed Americans, who are striving to return to being middle class. It could easily backfire on him.
The now pretty much united Republicans are trying to portray Obama as more focused on fund-raising than on governing. Given he has done 160 events so far (compared with George Bush's 74 at this time in the 2004 race), including six in just six hours in Maryland last Tuesday, this will not be a hard case to make.
A few weeks ago it was unimaginable that America's first black president may be in danger of not winning a second term but that prospect is now causing apprehension and even panic among Democrats.
The failed recall of the Republican governor Scott Walker in the highly unionised and overwhelmingly Democratic state of Wisconsin is being seen as a huge wake-up call that the party cannot assume that it will win in the presidential election in November.
Consolidated polling is showing just a two-point difference between Obama and Romney. Even among the three key demographics Obama felt confident of holding - women, young people and Latinos - the numbers are starting to close.
If Romney chooses Latino Florida senator Marco Rubio as his running mate, as a straw poll among party conservatives advocated this week, they could be a formidable team able to make significant inroads into the much-needed Latino vote in states such as Florida and Arizona.
Obama shows no signs of improving his ticket would he ditch the Vice-President, Joe Biden, although refreshing his team would seem to be a no-brainer in a tight electoral race. If this is not the time to place the extremely popular Hillary Clinton on the ticket, when is?
Obama's team foolishly set the bar high by leaking their expectation that their guy would be the first in presidential election history to raise $US1 billion and that Priorities USA Action, his super-PAC, would rake in another $100 million. Instead, Obama is struggling to reach the revised target of $750 million and his PAC, according to New York magazine, has just an embarrassing $10 million.
So we will be seeing a lot more of Obama with movie stars and the super-rich in coming months. The only question is whether the money raised will be at the expense of his political credibility - and his electoral prospects.
Twitter: @SummersAnne
Follow the National Times on Twitter: @NationalTimesAU
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