Spanish and Italian Bond yields reaching critical levels as Greek elections nears

Tom Tong13/Jun/2012Currency Updates

EUR

The euro fluctuated against the dollar before falling against most of its major counterparts as Spain’s borrowing costs rose to the highest rate since the launch of the euro in 1999, touching 6.83%. Similar-maturity Italian bond yields rose 14 basis points to 6.17 percent (breaking the 6% barrier sparking the question whether it will be the next nation to be bailed out). These interest rates are seen as unsustainable in the long run for two countries weighed down by huge debts.

Further, ratings agency Fitch downgraded the creditworthiness of 18 Spanish banks, following its decision on Monday to cut ratings on the country’s two largest banks, Santander and BBVA. Fitch stated that the nation would not meet budget-deficit goals, adding to concerns that Europe’s debt crisis is worsening.

Investors are now concerned over how difficult it may be for Spain to access debt markets in the longer term, and current holders of Spanish debt are worried about falling to the back of the line for repayment.

We may see high volatility in the market before the weekend as Greece is scheduled to hold elections on June 17th after a previous vote last month failed to produce a viable governing majority. As a worst-case scenario should Athens decide to leave the euro, European officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks, and introducing eurozone capital controls.

As a solution for the big mess, the European Commission have recommended a European banking union with a single regulator to oversee banks across all 27 EU states; but disagreements over the proposals highlighted the problems of finding a solution to the crisis.

Today, Italy is scheduled to sell 6.5 billion euros ($8.1 billion) of 364-day bills today and offer debt maturing in 2015, 2019 and 2020 tomorrow.

GBP

Yesterday, we saw a surprise fall in UK manufacturing output in April (the figure was worse than expected), raising fresh fears about the wider economy which has put pressure on the Bank of England to up quantitive easing and bloster Britains’s prospects.

The pound climbed to the strongest this month against the euro after Fitch Ratings said AAA nations in the currency bloc are at risk of downgrades, boosting demand for the perceived safety of U.K. assets.

Sterling advanced for a second day versus the dollar after a U.K. report showed an index of house prices improved in May more than economists had forecast. Gilts dropped for a second day as bidding declined at a 4.75 billion-pound ($7.38 billion) sale of five-year notes.

USD

Not too much news coming out of the US although there is some important data to be released today, including retail sales and producer price index. All eyes will be fixed on whether the US economy will continue to stall, and could have a large bearing on risk sentiment and safe-haven demand.

The Federal Reserve Bank of Chicago President Charles Evans said he would support a variety of measures to generate faster job growth, underscoring his preference for more stimulus.
The policy-setting Federal Open Market Committee meets next week as slowing job growth at home and a deepening crisis in Europe weigh on the outlook.

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Written by Tom Tong

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