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Spanish bailout causes buying frenzy
Publication date: 11 June 2012
Author: Simon Denham, Capital Spreads
So another domino falls to the bailout facility set up by the eurozone as the rumours that Spain would go cap in hand to the EU this week end have become a reality. Equity investors are breathing a huge sigh of relief as European indices jump on the open and even higher than our original estimates however there are still lots of unanswered questions about how this particular bailout will work and then of course whether it will prove to be the right solution. If history is anything to go by we have seen that bailing out banks doesn’t work in the short term as we only have to see the struggling share prices of our own nationalised banks. The severity of the problems that these banks have been getting themselves into has been vastly underestimated by many and once again we see that the answer from politicians is to throw good money after bad.
The bailout funds at least have been set up specifically for this purpose but at the moment it is unclear which bailout fund will be used. Is it to be the EFSF or the ESM, this matters because of the seniority that the debt with be given compared to other private debt investors and if it’s the ESM then private debt holders will be moved down the pecking order. Some EU countries are now looking to ratify the bailouts and so another hurdle is put in place to the whole set up.
As another €100b is piled onto Spain’s humongous debt mountain their ability to ever repay it all will only become a reality if their economy takes a turn for the better. The likelihood of this is very slim indeed considering the rate of unemployment and the massive housing bubble that is still bursting. It will be interesting to see whether this jump in equities on the open can be sustained as when the dust settles the focus will be back on Greece which goes to the polls again this week end and of course the next big worrisome elephant that’s just entered the room, Italy. Just as their national football teams could not be separated over the week end, the countries budgetary problems are very similar indeed and if Italy’s ten year government bond yields starting heading back and above 6% then alarm bells will ring again.
The FTSE has opened in very bullish mode up over one and a half percent at around 5525. Those clients who were savvy enough to buy ahead of the week end will be rubbing their hands with glee and we can expect the action to revolve purely around the Spanish bailout as there’s little else in the way of economic data out today.
Fitch downgraded Spain’s credit rating by 3 notches to triple-B on Friday pushing the euro lower against the dollar. However, renewed hopes the euro zone governments might just about pulled this off by working together sparked a recovery but not enough to pare all the early losses. The shared currency closed 57 pips down at $1.2504 but good news over the weekend after Spain sought 100 billion euro to prop up its banking system already had a positive impact.
A stronger US dollar sent gold prices tumbling on Friday but expectations of a rescue package to bailout Spain’s struggling banks overturned that. It was again gold buying as an alternative asset considering the plan for extra monetary easing. In addition, gold opened higher last night after Spain requested an aid of 100 billion euro, showing its willingness (and Europe’s as a whole) to tackle the debt burden.
Elevated crude oil inventories coupled with disappointment over what appeared to be a lack of commitment from the Fed pushed the WTI crude prices to an intraday low of $82.00. Nonetheless, optimism the European officials might come up with a plan to save Spain’s banking system offered a late rebound and even pushed oil prices 47 cents into positive territory to $84.10. OPEC’S meeting in Vienna, scheduled for Thursday will likely be in focus.
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