03/29/2012 03:04 pm ET Updated Mar 29, 2012

European Debt Crisis Flares Again Amid Violent Protests In Spain

Oh boy, here comes yet another flare-up in the European debt crisis -- which, unlike an "Anchorman" sequel, nobody wants to see.

It hasn't even been, what, a month now since Greece's debt problem got kicked soundly down the road for another day, and suddenly we're starting to worry about the fiscal health of a far bigger European country, Spain.

Spanish workers staged massive strikes and protests Thursday over reforms that would make it easier for companies to hire and fire them. Some of the protests have devolved into violence, an echo of the frequent unrest that marked Greece's debt crisis.

Spain's stock market is "teetering on the edge of an outright meltdown," writes Vincent Cignarella at The Wall Street Journal's MarketBeat blog.

And the bond market, after taking it easy on European sovereign debt for a few months, is starting to pick on these countries again. Spain, the fourth-biggest economy in Europe, is now paying about 5.5 percent to borrow for 10 years. In comparison, if you're an American with decent credit and can find a bank willing to give you a loan, you can borrow money for 30 years at little more than 4 percent to buy a house, the price of which is still probably falling.

In other words, you might very well be more credit-worthy than the government of Spain, which the Associated Press on Wednesday described as "fast becoming Europe’s riskiest economic link."

This is still not a crisis-level borrowing cost for Spain, which was paying north of 6.5 percent to borrow at 10 years in November, when the European crisis was in full boil.

Since then, the European Central Bank has twice pumped cash into European banks, in December and February, to encourage them to buy European sovereign debt. This neat trick has been called the "Sarkozy trade" because French President Nicolas Sarkozy dreamed it up.

The Sarkozy trade has worked like a dream so far, writes Peter Eavis of The New York Times, using a "Mad Men" reference for extra traffic juice. Spanish banks have bought 38.7 billion euros' worth of Spanish bonds in the first half of the year, more than double their purchases in the second half of 2011, Eavis writes. That's a big reason Spain is having an easier time borrowing.

Italian debt, another crisis hot spot, has been a winner under the Sarkozy trade, too. Italian bond yields last November spiked well above 7 percent, into the danger zone that caused vultures to start circling the country. Today they yield less than 5.25 percent, making the country's debt burden easier.

Ah, but those yields have risen lately, to their highest levels in nearly a month. The fear is that the ECB's free money will not last forever, and banks will eventually lose their appetite to buy risky sovereign debt, meaning shaky fundamentals will start to reassert themselves again.

As in Spain, Italian workers are planning strikes, too, and technocratic Italian Prime Minister Mario Monti is struggling to hold his austerity-minded ruling coalition together, Reuters reports.

And let's not forget Greece -- which, as we mentioned earlier, was just saved less than a month ago, when its debt holders swallowed ugly losses in a controlled default and Greece got a fresh wad of bailout euros. The head of sovereign ratings at Standard & Poor's told Bloomberg TV on Thursday that Greece may need to go through that process all over again.

We haven't even talked about Portugal yet, which may need another bailout as soon as this spring, writes Charles Forelle of the Wall Street Journal.

All of this fresh anxiety has been pounding European stocks as well as European debt Thursday. The German DAX index fell 1.8 percent, as did the Euro Stoxx 50 index. It's causing some mild indigestion in U.S. markets, too, where the Dow Jones Industrial Average was recently down by more than 50 points, on track for its third straight decline. Update: The U.S. stock market rallied back to roughly unchanged at the end of the day.

Most market watchers are still not exactly panicking about Europe, likening its debt crisis to a chronic but not fatal illness that is just going to flare up every now and then. We might as well get used to it. ECB chief Mario Draghi, who made the "Sarkozy trade" a reality, has proven he's not going to sit back and watch everything get pear-shaped again.

"We continue to expect European financial conditions and credit markets to improve in fits-and-starts over the coming quarters," MKM Partners chief market strategist Michael Darda wrote in a note to clients on Thursday.

European finance ministers meeting in Copenhagen on Friday will likely approve boosting the giant cash pile they will use to put out debt-crisis fires to $1.3 trillion. That could calm markets for a few days.

But you take what will almost certainly be a lousy European economy for some time to come, thanks partly to the austerity measures that are being jammed into place as a result of this debt crisis, throw in a China slowdown, which still risks turning into a hard landing and/or credit crunch, and suddenly the global economy looks a tad grimmer. That makes it just that much harder for the U.S. economy to keep its own momentum going.