Banking Reforms In Spain May Be Game Changer

Banking Reforms In Spain May Be Game Changer

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 14th of September.

Banking reforms in Spain may be the game-changer:

Madrid’s claim that the latest banking overhaul approved on August 31 to be the most definitive one till date would have dismissed as hot air by the international authorities like previous such claims unless backed by supporting details.

The new law creates bad banks stuck in the rut and establishes procedures to wind them down. The bad bank, in turn holds all the dud assets on its balance sheets including half-built apartment blocks, empty housing estates and vacant building lands spread across the country that have little value, and cripple the operations of many cajas or savings banks.

The banking reform is the fallout of strict conditions attached before the EUR 100 billion bailout was approved for the country’s ailing banking sector. The reforms may find greater acceptability among the ordinary Spaniards though it’s yet to be seen how much loss the small investors, who hold preferential shares of stricken banks, will be forced to accept once the banks receive bail-out money.

Perhaps as a reminder of the magnitude of the problem, Bankia, Spain’s recently nationalised giant that received generous government funding, announced it lost EUR 4.45 billion in the first half of the year within hours of the reform being announced.

Mariano Rajoy’s government claims the reforms will not cost ordinary citizens anything. But the proposed bad banks will hold useless real estates that were part-funded by tax-payer’s deposits. A rough estimate shows Spanish lenders have about EUR 180 billion worth exposure in toxic real-estates. That’s a lot of money by any standards!

The amount of loss forced on investors will depend upon the bad banks. If it pays too little, the good banks will need public money to fund the shortages. If it pays too much, it will book losses over the next 15 years as it disposes the assets. Either way, nothing will come free.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2410
GBP/US$ – 1.6191
GBP/CHF – 1.5098
GBP/CAN$ – 1.5644
GBP/AUS$ – 1.5306
GBP/ZAR – 13.3132
GBP/JPY – 125.68
GBP/HKD – 12.5610
GBP/NZD – 1.9412
GBP/SEK –  10.5905

EUR:   Risk is on following the US Fed’s decision to restart monetary stimulus measures yesterday. The EUR/USD pair breached the 1.3000 level to hit an intraday high of 1.3051 and have managed to stay above that level overnight for the first time since April/May to open at 1.3025 this morning. This week’s developments have been largely euro-positive including the German high court’s decision on ESM and outcome of Dutch election. EU finance ministers are due to meet today to discuss recent events with Europe while inflation data is also expected in the morning. Spain is expected to announce if it requires more help following the ECB’s decision to buy more bonds. The singke currency has firmed up against the cable over the past 24 hours and the GBP/EUR pair opens at 1.2430 this morning.

USD:  The US Fed took out its bazooka yesterday announcing an open-ended $40 billion mortgage backed security purchase program every month till the economy improved while keeping interest rates unchanged at 0.5 percent. The latest program will run parallel to “Operation Twist” already in play. The amount, though fell short of expectations, was good enough to push the USD down as Bernanke later clarified that the Fed will keep the door open for further assets purchase should economic data, including employment numbers, fail to improve. We have some more market moving news today in the form of US retail sales, core CPI and consumer sentiments later in the day. The GBP/USD pair opens at 1.6195 this morning.

Have a great weekend

 

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