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By Ambrose Evans-Pritchard
Analysts at the French financial group AXA see a serious likelihood that the eurozone will break in half or disintegrate, dismissing Europe's €750bn (£623bn) rescue package for Club Med debtors as a stop-gap measure that misdiagnoses the problem.
"The markets are very nervous because they can see that there is a fatal flaw in the system and no clear way out," said Theodora Zemek, head of global fixed income at AXA Investment Managers.
"We are in a very major crisis that has even broader implications than the credit crisis two years ago. The politicians have not yet twigged to this."
Ms Zemek said the rescue had bought a "maximum" of 18 months respite before deeper structural damage hits home, with a "probable" default by Greece setting off a chain reaction across Southern Europe. "It would be the end of the euro as we know it. The long-term implications are at best a split in the eurozone, at worst the destruction of the euro. It is not going to end happily however you slice it," she said.
The warning came as Spain's authorities were forced to shoot down German media reports that Madrid was preparing to tap the rescue facility after ructions in the inter-bank market.
Carlos Ocampa, Spain's treasury secretary, said smaller Spanish banks are struggling to roll over debts but denied that the country is seeking outside help. "The rumour is false," he said.
Spanish banks increased reliance on funds from the European Central Bank to a record €86bn in May.
Berlin said Spain "does not meet the conditions" for the aid package in any case, even though the socialist premier Jose Luis Zapatero has already provoked a general strike by cutting public wages by 5pc. It is becoming clear that German demands for austerity across EMU are nearing the limits of political tolerance, and may prove self-defeating as 1930s-style wage deflation sets off a vicious circle.
AXA fears 'fatal flaw' will destroy eurozone
