ECB rejects Spain’s plans for Bankia

30 May 2012  •  Source: Mark Bolsom, Travelex

Following a relatively quiet start to the week the euro is back in the firing-line this morning after the European Central Bank yesterday rejected Spain’s recapitalisation plans for Bankia, one of the country’s biggest lenders in desperate need of a €19bn rescue. In addition, Madrid suffered another ratings downgrade which is now expected to add even more pressure on Spanish government bonds; making it even more expensive for the country to borrow in debt markets. Spain’s economic troubles have long been evident; however, cracks in its banking sector have widened at a rapid pace since risks of Greece exiting the euro materialised at the beginning of May.

Tuesday’s trading activity was not much different from recent trends. Stock markets are back under pressure whilst demand for US, UK and German government bonds rose. In currency markets, the US dollar and yen surged, with the former clocking two-year highs versus the euro. Sterling managed to hold levels against its more risky counterparts after UK retail sales data beat market forecasts. The pound did however take another tumble against the US dollar and is quickly approaching four-month lows.

The outlook for today is likely to be more of the same; speculation Spain could be the next causality of the eurozone debt crisis unless Greece decides to stay in the euro and the European Central Bank ramps up its emergency bond-buying programme. Markets will also study reports on UK mortgage approvals, eurozone economic sentiment and US pending home sales. However, Italy will attempt to raise money through a bond sale this morning and investors should stay alert to the level of prices paid as a sign of investor confidence. Attention will then shift to the ECB’s chief, Mario Draghi, who will be speaking in Brussels this afternoon. No sign of ECB intervention could give the safe haven US dollar another boost.

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