Financial News

Markets pour scorn on the euro’s reign in Spain

It’s plain it never rains in Spain, but pours … and even a €100 million bank bail out may not be enough to staunch the rot in Europe’s fourth largest economy.

Underpinning Spain’s banks with cash from the European Central Bank’s emergency fund was intended to infuse the markets with new confidence in the single currency.

After initial enthusiasm, the plan seems to have backfired.

Early market and trading gains and improved euro rates against a basket of currencies slipped away as Spanish government 10-year bond yields reached a new high 6.415% as investors backed against a revival.

As with many decisions in Europe, the move seems to have left more questions than answers.

Economists, bankers and investors have some key questions:

  • Is €100 billion enough? The answer may not be known for some time as independent auditors pore over government accounts
  • What does the fine print of the loan deal say? So far, the world has been told a loan has been brokered, but no one knows the terms or where the money is coming from. Everyone needs to know the term, the interest rate and the lender to assess how the deal affects the money Spain already owes.
  • Subordination is another issue – will the new lender go ahead of the rest of the nation’s creditors and how will the loan affect their paper?
  • How will the rating agencies react? The likelihood is Spanish bonds and banks face another round of downgrading and will this push up the cost of credit beyond 6.415% and stress the economy even more?

Nevertheless, the pressure is off for a few days – June 17 sees the next election in Greece and a shift in focus to what the results will mean for the euro with President Obama and the International Monetary Fund clamouring for decisive action to stop the euro dragging down other currencies.

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