Since the onset of the financial crisis, there have been several intermittent phases that made you think "The crisis is over. The worst is behind us." After all, there are few signs of the crisis, least of all here in Germany. On the contrary: the economy is humming, unemployment is drying up; and while inflation has somewhat risen, it has been a rather modest rise.

But appearances are deceptive. For it is not at all clear which way forward with Spain and Italy. In a matter of weeks, the yields of Spanish ten-year bonds have risen from five to over six percent. Similarly, Italian government bonds gained by around 100 basis points within a few weeks' time, with the yield rate rising rising to 5.6%. And these are no true figures. The market mechanisms have been largely deactivated by ECB buy-ups of government funds and by domestic banks in the Southern European crisis countries. Who can say where the yield rates of Italian and Spanish bonds would be if the ECB was not rendering "assistance"?

Around 75% of the ECB lending volume is now pouring into the institutions of the crisis countries in Southern Europe, which use the money to buy up their own government bonds so as to keep yield rates "low". On the side of the ECB, this has caused the bank's total assets to swell to three trillion euros in no time at all. "The assets of nearly three trillion euros are backed by barely 85.5 billion euros in capital and reserves. This equals a leverage of 35 (total assets/equity), and would prompt the financial supervisory authority to intervene in the case of any commercial bank. If you consider the quality of the assets, then the ECB is on a level with highly speculative hedge funds," said Frank B. Werner, editor-in-chief of the EURO AM SONNTAG weekly, in a brilliant commentary this week.

For Spanish banks alone, the portfolio of government bonds grew by 26% between December and January to a total of 220 billion euros, while banks in Italy raised their portfolio in Italian bonds by 31% to 267 billion euros. That the yields on government bonds still rose to about six percent, in spite of these desperate bailout actions and the associated “cosmetics”, shows how serious the situation has become.

The Spanish Minister of Economy said recently: “Spain is capable of handling the issues on its own.” This statement, too, is testimony to the direness of the situation.

Let us remember:

• On 6 January 2010, the Greek Finance Minister stated: “Greece requires no aid from the European Union.” Barely five months passed after this announcement before Greece applied for EU aid.
• On 16 November 2010, the Irish Prime Minister stated that Ireland had not applied for outside help, nor would it. In this case, not even a week passed until Ireland applied for aid.
• On 11 January 2011, Portugal’s Prime Minister tried to dispel worries by saying: “The Portuguese Government and Portugal will not apply for financial aid because it won’t be necessary.” The Portuguese application for aid was filed four months later.

In Italy and Spain, the massive assistance rendered by the Northern European countries is increasingly paralysing the will to tackle reforms. Most recently, the unions blocked a reform of the antiquated labour law.

There are plenty of signs suggesting that we might see a repeat of things already witnessed these past years: a phase of treacherous calm will be succeeded by the next step in the escalating crisis. Except that this time governments and central banks have long used up their ammunition.