Business World

Saturday 24 March 2018

Debt Crisis: Euro hits two-and-a-half year lows on Spanish bailout fears

Spain's Prime Minister Mariano Rajoy
Spain's Prime Minister Mariano Rajoy

Richard Hubbard

THE euro hit its lowest level in over two years and world shares fell sharply on Monday after reports that Spain's indebted regions needed help fuelled fears that the country will become the fourth eurozone member to ask for a major bailout.

US stocks were poised to join the selloff with futures prices indicating a much lower open on Wall Street.

Spanish media reported that up to six regions may seek aid from the central government after Valencia asked for funds on Friday, sending yields on all Spanish government bonds sharply higher and 10-year debt to a euro-era high of over 7.5pc.

"Given the market reaction on the back of the news that more and more regions are looking to tap in to the liquidity fund..., it will be very difficult for Spain to circumvent further support for itself," said Norbert Aul, a rate strategist at RBC Capital Markets.

Spain must make coupon and redemption payments to bondholders totaling €20bn next Monday, followed by nearly €25bn in October, according to Reuters data.

Economy Minister Luis de Guindos, who visits Berlin on Tuesday for talks with German Finance Minister Wolfgang Schauble, has insisted Spain does not need a full sovereign bailout such as the ones taken by Greece, Ireland and Portugal to stay afloat.

Spain reached a deal with its eurozone partners for a bank bailout worth up to €100bn and is implementing a series of austerity measures but the shrinking domestic economy is piling up problems for Madrid and unnerving investors.

The Bank of Spain said on Monday the economy had sunk deeper into recession in the second quarter, contracting at an annualised rate of 1pc.


Concerns over Greece's future within the euro zone have also resurfaced ahead of the visit to Athens by a group of international lenders on Tuesday.

They must decide if the government has done enough to qualify for further rescue payments and avoid a chaotic default.

The combination of worries about Spain and Greece sparked a broad slide in the euro, which was already weakened by European Central Bank rate cuts earlier this month.

The single currency fell 0.6pc to $1.2082 , its lowest level since June 2010.

"What began as a Spanish banking bailout looks to be moving rather quickly towards a possible sovereign bailout. Overlay that with increasingly negative news on Greece and you get a fairly negative mix, so the path of least resistance for the euro is down," said Jeremy Stretch, currency strategist at CIBC.

Data from the Commodity Futures Trading Commission released on Friday showed that currency speculators are increasing their bets in favour of the U.S. dollar as the euro zone debt crisis and its impact on global growth deepens.

"The ongoing negative developments in Europe support our view that the defensive currencies of the yen and the U.S. dollar will remain firm in the near-term amidst euro weakness," said Lee Hardman, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

The steady trend away from riskier assets has pushed safe-haven bond prices higher and yields lower across the board.

Ten-year U.S. Treasury note yields hit a record low of 1.4246 percent in Asia on Monday, while Japanese government bond yields fell to their lowest level since 2003 and German 10-year Bunds fell to a record low.


Italian 10-year government bond yields shot past Irish ones for the first time since January 2009, gaining 16 basis points to 6.37pc, as investors worried Italy could be the next country to run into trouble.


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