Spain steals limelight from Greece as banking crisis worsens

Tom Tong31/May/2012Currency Updates

GBP

Sterling fell to a four-month low against the dollar on Wednesday as worries about Spain’s banking sector problems and its rising borrowing costs pushed investors into the safety of the U.S. currency. However, sterling was expected to remain well supported against the euro as investors seek alternatives to the troubled common currency.

Other UK assets seem to be holding up well with data on Wednesday showing Britain’s property market picking up in April, as well as strong corporate bond issues continuing with GE Capital raising £300m of September 2015 bonds and BAE Systems £400m 10 year bonds.

EUR

A Spanish plan to recapitalize Bankia, the Spanish lender, by indirectly tapping the ECB for cash, was bluntly rejected as unacceptable by the ECB, with the bank telling the Spanish government a proper capital injection was needed for Bankia and that its plans were in danger of breaching the EU ban on “monetary financing”.

Spain faces elevated borrowing costs in the bond markets, with the banking sector weighed down by €180bn of bad property loans. The ECB’s rebuff appeared to toughen Madrid’s insistence that the only solution to the crisis that is pushing borrowing costs to unsustainable levels (increasing to 6.7%) is for the ECB to become a government lender.

Under EU rules, Spain needs to reduce its fiscal deficit from 8.9% of GDP, to 3% by a proposed extension of the deadline to 2014. As part of its second annual economic health check of European Union members, the European Commission said Spain needed further reforms, stating Spain’s economy will shrink by 1.8% this year and 0.3% next with the unemployment rate hitting 25.1% in 2013.

Proposals from Brussels are that the 17 countries that use the euro should set up a “banking union” that allows them to share the burden of bank failures as worries grow across the board.

On Grexit news the anti-bailout party Syriza is back in the lead – putting the country back on path to leaving the eurozone and sending stocks plummeting.

USD

The dollar lost its safe haven appeal as the yen hit fresh multi-month highs against the euro and dollar in Asian trading on Thursday, as nervous traders flocked to the safe haven Japanese currency amid worries over Spain’s faltering bank sector.

Investors fled from risk assets to U.S. government bonds, with the benchmark 10-year Treasury yield falling below 1.6 percent in early Asian trade on Thursday, its lowest in at least 60 years. As well as benefitting from escalating risk aversion, although gold, a traditional safe-haven asset, struggled in the face of the greenback’s strength.

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Written by Tom Tong

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