Euro confusion triggers China’s rate cuts

Lisa Smith, BA (Hons), CeFA

The phrase ‘laissez faire’ was coined in Europe – and it seems to be the economic policy that works best for the euro.

As the European Central Bank left interest rates alone but confirmed it was ready to act in an emergency, nothing really changed in Europe.

Spain is still coyly flirting with a bail out, but is ready to test the market with a new bond offering after the last tipped the 6.5% red line that makes borrowing unaffordable for the government.

The Spanish 10-year bond has a yield of 6.22%

The country wants and needs financial help, but is determined to try to avoid a political confrontation with German and French paymasters in the same way as Greece.

A report by the International Monetary Fund suggests Spanish banks need a cash injection of at least €40 billion (£32 billion), with a longer term requirement of €90 billion to bolster the entire banking sector.

The Euro has risen slightly against the US dollar on the decision, while the Pound has lost some ground.

Meanwhile, China has added to the currency confusion by cutting interest rates.

The People’s Bank of China sliced 25 basis points brings the one year borrowing rate to 6.31% and the one year deposit rate to 3.25% after announcing rates would not be cut to sustain growth.

One reason for the change of mind is that the European Union is one of China’s biggest customers, and a fall in demand against more expensive imports would be another domino to topple in the Eurozone debt crisis.

Behind the scenes, Germany and nine allies are ready to go alone with tighter monetary links if the UK and other countries continue to block the transaction tax on financial institutions, seen by Germany as the solution to raising cash to bail out the failing Eurozone economies.

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