Single Currency Slumps Yet Again on Renewed Spain Fears

on Jul 25, 2012
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Although the Eurozone finance ministers agreed on a recapitalisation package for Spain’s, concerns about the country’s finances are far from being over. On 20 July 2012, Reuters reported that Spain’s Valencia region was on the verge of seeking central government help to repay its debts, which in turn caused the euro to go down, reaching a two-year low against the dollar, and record lows against some of the commodity currencies, namely the Canadian, Australian and New Zealand dollar.

Valencia and Catalonia are Spain’s most indebted regions, with Valencia seeking help under an €18 billion programme, which the Spanish government introduced to help cash-strapped regions. “Like other regions, Valencia is suffering the consequences of liquidity restrictions in markets as a result of the economic crisis,” Valencia’s regional administration said on its website, as quoted by Bloomberg. According to a recent Financial Times article, however, Valencia was one of the engines of Spain’s real estate bubble, with all three of Valencia’s savings banks falling under state control on account of aggressive lending to developers.

!m[](/uploads/story/205/thumbs/pic_1_inline.png)The FT also noted that Spain had hoped that the bank overhaul would reassure financial markets that it can contain the crisis and avoid the need for a larger bailout. The first payment of €30 billion is scheduled to arrive before the end of July so that Spain can begin recapitalising its financial system. The full extent of the Spanish programme, however, will not become clear until September when the Spanish government is due to complete its assessments of individual banks so as to determine their capital needs.

Valencia’s attempt to seek bailout caused the common European currency to fall to as low as $1.2143 against the greenback, or its weakest level in two years. Reuters also reports that Spanish 5- and 10-year debt yields surged to euro-era highs. “It’s all about Spanish bond yields today, and the euro as a result is under pressure,” notes Martin Briggs, foreign exchange risk advisory consultant for AFEX Markets Plc, as quoted by Reuters.

In addition, the Spanish government made a cut to its 2012 and 2013 economic growth forecasts, which put yet additional pressure on the euro. According to the revised estimates, Spain will be mired in recession well into 2013.
The new forecast and Valencia’s financial difficulties sent the euro plunging to record lows against the Australian, Canadian and New Zealand dollar, all of which are considered to be commodity currencies. In addition, the euro also hit a more than an 11-year low against the Japanese yen.

According to the Reuters article, many analysts noted that the fact that commodity currencies such as the loonie and the aussie were rallying against the euro despite concerns about the slowing Chinese growth was an indication that the euro’s weakness could continue.
Yet, the euro’s decline against the US dollar was slowed due to speculation that the Federal Reserve may opt for another monetary easing round so as to boost economy growth, which would increase the supply of dollars in the system.

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