“the euro crisis had a Christmas break, but it’s back”

With Portugal heading back to an increasingly reluctant bond market, the BBC’s Europe editor, Gavin Hewitt, notes that “White knuckles have re-emerged in Brussels and other vulnerable European capitals.”

Sometimes in Brussels I detect that the fight is less to save Portugal but more to ring-fence Spain. It’s the fourth-largest economy in the eurozone. If it needed rescuing the funds currently are probably not there. And then awkward questions would have to be asked – including whether Germans, in those circumstances, would commit further treasure towards what would be a giant bail-out.

Spain has made progress in reducing its deficit. Its target for 2010 was to get its deficit down to 9.3%. It says it has done “somewhat better” than that. It also says it is on target to have the deficit down to 6% by 2011.

They are also hoping to benefit from the warm embrace of China. The Chinese have been buying up Spanish sovereign debt. They may well now hold 10% of Spain’s national debt.

(In a future blog I will examine China’s growing influence in Europe.) But even with Beijing’s actions the cost of servicing Spanish debt is rising.

Read the whole thing.

And with the Portuguese government and the European Commission denying reports of bailout talks, all eyes, as ever, will be on Frau Bundeskanzerlin…