Spain becoming flashpoint of debt scourge as euro swoons

Posted On: April 05, 2012
Government bonds of two euro zone nation's long-rumored to be on the cusp of being snared by the talons of the sovereign debt crisis pulled down the value of the shared currency of the European Union on Thursday, according to Bloomberg.

The euro dropped to its lowest value in 21 days against the U.S. dollar as bonds from Spain and Italy drooped. France, the second-largest economy of the beleaguered euro zone that has been coping with the destructive tendencies of the debt crisis for two years, saw borrowing costs climb at one of its auctions. Germany hosts the region's biggest economy, for which it typically serves as the lodestar on topics economic and financial.

So too did the euro lose value against the Japanese yen, also sinking to its lowest rate in three weeks against the monetary unit of the Pacific Rim nation.

Ten-year bond yields in Spain hurtled to their largest spread when held against German bunds since November of last year, prompting investor preoccupation regarding the Spanish prime minister's solicitation of international bailout aid of the sort already awarded to Ireland, Portugal and, on two occasions, Greece.

"We've certainly seen some tensions coming back, especially concerning Spain," currency strategist Vassili Serebriakov with Wells Fargo in New York told Bloomberg. "It's definitely been more of a risk-off day and currencies suggest that the yen and the dollar are the best performing G-10 currencies."

The value of the euro dropped to its lowest rate against the U.S. dollar since the middle of March.

During the past week, the 17-nation monetary unit has lost 1.2 percent of its value, distinguishing itself as the worst-performing developed-nation currency of 10 monitored by Bloomberg.

"It reflects a growing unease in Europe over Spain's finances, and that's a good part of the euro weakness," chief dealer Thomas Molloy with FX Solutions in New Jersey told Blooberg. "There's definitely some concerns starting to come to the fore in Europe, specifically about Spain."

The Guardian reports international concerns for Spain's economic outlook are gaining momentum.

In addition to finding itself in peril, Spain also poses a threat to less established neighbors in the euro zone. The International Monetary Fund, a Washington-based regulator, specifically noted the hazardous situation that Spain now finds itself in amid budgetary restraints that ought to be implemented.

"We will point to the need to ensure compliance with the new target, not just at the central level also at the regional government level," IMF spokesman Gerry Rice told the news source. "Clearly the challenges Spain is facing are severe. Market sentiment remains volatile."

A large part of the danger posed by Spain stems from its economy being twice as large as the combined economies of Greece, Ireland and Portugal.

Spain already has acknowledged its debt is likely to expand to its highest level in roughly 20 years, which did not bode well in anticipation of the Thursday bond auction.

"We're increasingly worried about Spain on the back of the sovereign's rising yields and the potential for contagion," analysts at Société Générale told The Guardian. "Spanish corporates are feeling the heat with clear daylight between them and their Italian counterparts in recent sessions."

Reuters reports director of research Dan Dorrow with Faros Trading in Connecticut told the news source that Spain is significantly larger than Greece, the most recent nation to receive a bailout from its sovereign debt troubles.

He said watching Spain's bond yields is of key importance and absolutely merits scrutiny and action by the European Central Bank.

"The euro zone firewall set up is not big enough to save Spain," Darrow said. "If the ECB were the Fed right now they would be embarking on quantitative easing or lowering rates, but the ECB is more passive in its approach, which is dangerous, and I think they are walking a tight rope."

Category: Industry News

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