Forex News: Markets Indifferent to News of Spanish Bailout

Jul 12 • Market Analysis • 1984 Views • Comments Off on Forex News: Markets Indifferent to News of Spanish Bailout

Forex news analysts said that despite news of a bailout package for Spain’s troubled banks, the outlook on the euro would continue to be bearish, with no reason to buy the currency as it would continue to trade low. Initial details of the bailout were announced by Euro Zone finance ministers after their two-day meeting in Brussels. The ministers said that €30 billion could be ready for the aid package by the end of July. As part of the deal, the deadline for Spain to meet a budget deficit target of 3% was expected to be extended by one year, to 2014.

While exact details of the aid package were not yet finalized, details of a leaked draft memorandum of understanding showed that the initial injection of aid capital to the banking sector would take place only by October at the earliest. Before being eligible to receive aid, fourteen banking groups, which comprise some 90% of the total Spanish banking sector, would be required to take a stress test. Stress tests are designed to analyze whether or not banks have sufficient capital to withstand adverse conditions and focus on a handful of key risks such as market and liquidity risks. In addition, banks eligible for aid would be required to impose burden-sharing measures to minimize the cost of the bailout to taxpayers. Although the markets seemed to initially be bullish on the bailout, forex news analysts said that the possibility of a full-fledged bailout would keep market sentiment on the euro bearish for quite some time. Euro Zone officials said that Spain may eventually need as much as €100 billion to fully bail out the banking sector.

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Adding to the bad news for the Euro Zone, forex news reports pointed out, was the continuing delay in the formation of the ESM or European Stability Mechanism, a permanent bailout fund mechanism which is intended to help stabilize the eurozone. The German Constitutional Court has delayed handing down a verdict on the constitutionality of Germany’s role in the formation of the ESM and it may take weeks before one is finally handed down. In addition, further bailout funds are likely to be required as Ireland is expected to request for a further €25 billion to pay off debt issued to rescue its troubled banking sector, Portugal is also expected to ask for an extra €9 billion to €10 billion, Cyprus an additional €12 billion and Greece, €16 billion to €20 billion more.

Recent forex news developments also pointed out the possibility that Italy may eventually ask for a bailout as well. Prime Minister Mario Monti has said that his government may tap Eurozone funds to buy back government bonds in light of increasing yields which could significantly increase the cost of servicing the debt. Bond yields were just slightly below 6% on July 9 and if they remain above that threshold, they could eventually reach 7%, which would make the cost of servicing them unsustainable. But Monti continued to insist that Italy would not need a bailout in light of austerity measures it is implementing to stabilize the economy.

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