‘Rain in Spain’ getting harder

2012-JUL-23

As Alasdair Macleod discussed in an article published on this site yesterday, the euro shorts haven’t gone away yet. Spain is back in the financial news in a big way this morning, with strikes rocking the country at the end of last week, while Valencia became the first Spanish region to officially appeal for bailout cash from the government’s newly created “National Salvation Fund”. Other regions such as Murcia and Catalonia are expected to follow suit. European leaders agreed on Friday to supply Spain with €100 billion of bank bailout cash, but many analysts do not think that this will be enough to rescue the chronically-ill Spanish banking system.

10-year Spanish government debt has hit new highs of 7.5% this morning, while Asian and European stock markets have sold off. Throw in the Greek prime minister’s comments yesterday that his country is in a “Great Depression” comparable to 1930s America – and with senior German politicians raising objections to more bailout cash for Greece, and thus implicitly questioning the country’s euro-membership – and little surprise that the euro has hit a new 25-month low at under $1.21. US Treasury and German Bund yields have also sunk to new record lows, while the Dollar Index is moving up towards 84.00.

The European Central Bank has reportedly not bought any Spanish debt for five months now, as part of the EU elite’s strategy for forcing the Spanish government to make cuts (something that is enraging Spanish politicians). The trick as far as Brussels/Frankfurt are concerned is keeping the pressure at just the right level, whereby politicians in PIIGS countries are incentivised to slash deficits, but without allowing the situation to deteriorate to such an extent that bank collapses, disorderly sovereign defaults and EMU exits start occurring.

So if Spanish yields continue climbing, the ECB will ride to the rescue, as they did late last year and early this year with LTRO and LTRO2. Perhaps the EURUSD doesn’t have much further to fall after all.