Spanish bailout detrimental in long-term?

Publication date: 12 June 2012
Author: Mark Bolsom, Travelex

Optimism around Spain’s rescue loan for its troubled banks quickly evaporated on Monday with investors still seeking clarity on the mechanics of the deal whilst growing concerned that adding to Madrid’s debt will prove to be detrimental in the long-term. Spain had earlier asked eurozone governments for a loan of up to €100bn to safeguard its banking sector.

Market reaction yesterday was one-way with stocks falling and risk-taking in currency markets drying-up. The euro slumped accordingly, especially against the US dollar and British pound, whilst other units that tend to track global sentiment such as growth-linked or emerging-market currencies also fell.

However, perhaps the most significant development yesterday was a spike in Italy’s government borrowing costs and a sharp sell-off in Italian banking shares. Concerns that Italy is not far behind Spain in terms of needing rescuing could put even more strain on the euro over the coming days. On a more positive note though, an assessment by the International Monetary Fund on Spain’s banking risks has proved to be less negative than what analysts were expecting.

With sterling regaining some of its safe haven appeal on Monday, it will again be at risk of profit-taking before today’s British manufacturing data which may reflect predictions that the UK economy will not emerge from recession without more quantitative easing. However, the figures may not have a lasting impact with the eurozone crisis entering what could turn out to be another critical phase.

Investors remain sensitive towards Spain’s plight and what that now means for Italy, the region’s third largest member, whilst nerves are mounting ahead of Sunday’s elections in Greece.