Spanish bailout boost to euro short-lived?

Comments 0
SummarySpain's apparent reluctance to seek financial aid means any eventual request may trigger only modest gains in the euro, as investors focus on the currency bloc's gloomy economic outlook.

Spain's apparent reluctance to seek financial aid means any eventual request may trigger only modest gains in the euro, as investors focus on the currency bloc's gloomy economic outlook.

The European Central Bank unveiled a plan in September to buy the bonds of countries that ask for assistance, dragging Spanish yields down from unsustainable levels and driving the euro to its highest against the dollar since May.

But two months later, and with no sign of a move from Madrid, the wave of optimism that swept the market is fading and investors are again fretting about a potential lost opportunity.

The bond-buying plan was seen as a rare example of decisive action by policymakers to resolve the crisis and the delay in activating the programme has raised concerns they may once again put off painful steps that would be unpopular with voters.

In these circumstances, concern about the euro zone's underlying economic weakness, which was masked by the bond-buying plan, is again to the fore.

The danger with a request in future is it's more likely to come from a position of weakness when (Spanish) bond yields start to move higher, said Steve Barrow, head of G10 FX research at Standard Bank.

If Spain had made an immediate request when sentiment towards the euro was more positive we might have anticipated a better reaction.

Bond yields have risen across the euro zone periphery since mid-October, pushed higher by uncertainty over Spain and over whether Greece will secure the aid needed to stop it going bust.

The euro hit a two-month low on Monday before the Greek parliament votes on Wednesday on austerity measures demanded by Athens's lenders. Rejection would see the euro fall as fears grew of Greece leaving.

Many analysts said the single currency could be also vulnerable to selling once the ECB began buying bonds, even if an initial knee-jerk rise followed a Spanish bailout request.

Ian Stannard, head of European FX strategy at Morgan Stanley, said he expected an aid request by year-end that would help the euro, now around $1.28, rise to $1.34 before retreating to $1.25 by mid-2013 as attention switches back to euro

Single Page Format
Ads by Google

More from World News

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...