Spain’s €100 billion bank bailout may not work

Spain’s €100 billion bank bailout may not work

By Sayan Guha.

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 12th of June.

Spain’s €100 billion bank bailout may not work. Though it may appear substantially higher than the €37 billion that the International Monetary Fund said it will require, the actual requirement may go up to €300 billion. The IMF’s estimate was based on the assumption that the small savings banks (cajas) would require a rescue, but larger Spanish banks are also in need of capital.

The banks have about €300 billion exposure in the Spanish property market and the Spanish central bank estimates more than half, about €180 billion, is problematic. It’s estimated about 700,000 newly built homes are lying vacant. The number is likely to cross the million-mark if repossessed homes are taken into consideration. A severe recession and a high unemployment rate would ensure more people falls behind their mortgages, worsening the €600 billion mortgage markets further.

To compound matters, the loan doesn’t come with any conditions. Soon Ireland, Portugal and Greece may start lobbying for easing of tough austerity measures, one of the reasons why the IMF refused to contribute. Spain has not been shut out of the capital markets yet. However, if a Greece-like situation arises in future that had forced private lenders to accept nearly 70 percent losses, Madrid’s banks would come under severe pressure since local banks hold about 60 percent of Spanish government securities.  Overall, the situation looks grim. May be Spain needs a lottery, probably its own El Gordo (the big one) since a full-scale rescue is impossible for Europe to provide, both economically and politically.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2392
GBP/US$ – 1.5479
GBP/CHF – 1.4888
GBP/CAN$ – 1.5951
GBP/AUS$ – 1.5638
GBP/ZAR – 13.0336
GBP/JPY – 123.08
GBP/HKD – 12.004
GBP/NZD – 2.0059
GBP/SEK –  10.9772

EUR: The relief over the Spanish bank-bailout proved short-lived on Monday and the single-currency weakened as the day wore on after important questions were raised around the bailout deal. The EUR/USD pair dropped to 1.2483 by the end of the day despite starting at a high of 1.2600 while the GBP/EUR pair rose to a late afternoon high of 1.2421, while starting the day at 1.2301. The Spanish equity market witnessed heightened volatility, closing 0.8 lower despite gaining 5.8 percent in early trade. Investors who had hoped that the bailout will bring down borrowing costs were for a shock as Spanish 10-year bond yields breached the 6.5 percent level while yield on 10-year Italian bonds jumped to 6 percent, the highest since Jan. The economic data calendar is light today and the impending Greek election over the weekend is likely to push the currency down.

USD: Cable started off on a high against the greenback on Monday as risk sentiments improved over the Spanish bailout news, but closed much lower as investors remained unconvinced over the long-term efficacy of the measure. Sterling weakened further after MPC member Adam Posen said his call in April to halt further asset purchase was too optimistic in hindsight with the deterioration in the European sovereign debt crisis and the slowdown in the UK economy. The UK industrial production reading was inline with market expectations today morning and there’s little else to look forward to today. The GBP/USD pair is expected to come under pressure as Athens gets closer to another round of elections. The GBP/USD pair opens at 1.5496 this morning.

 

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