bank downgrades Spain

mar bonnin palmer

The day was stolen yesterday by the ratings agency Moody’s after rumours in the afternoon that a raft of bank downgrades were on their way was confirmed after the close of trading in New York. Morgan Stanley and Credit Suisse were the main victims although there were downgrades for RBS, Barclays and HSBC here in the UK. Stock markets clattered lower on the rumours but the confirmatory announcement has not seen too much fresh selling. These banks had been on watch since February so to a certain extent some of this was priced in.

The moves lower in risk helped the dollar into a stronger position with Euro lagging the pound through the session.

News from Spain yesterday, which is the new battleground for the bulls and bears, was good for once. Yesterday’s bond auction saw strong demand although we expect 99.9% of that demand was from local banks for collateral purposes so we can’t read too much into that. Yields were higher obviously but we have to remember that funding is not closed off to Spain, they can get what they want but they’re going to have to pay for it.

It was interesting to see that the falls in the 10yr yield was not reflected in gains for the euro. Spain is large enough to influence Germany, a luxury Greece never had, and this relationship will define the upcoming 6 months in the Eurozone. Merkel, Hollande, Rajoy and Monti, the leaders of Germany, France, Spain and Italy respectively meet in Rome today to flesh out plans for next week’s summit during which we expect to see some chatter about a banking union alongside further calls for Eurozone bonds.

The other news from Spain yesterday concerned their banks and the amount of recapitalisation cash they would need. The IMF had put the figure at around EUR40bn while the recent bank bailout made up to EUR100bn available. It was the view of two independent auditors that somewhere around EUR60bn would be needed based on a house price fall of a further 25%. The figure matched market expectations but moving forward does not answer a fair few interesting questions. We still do not know if the new debt is senior to other Spanish bonds nor do we strictly know where the money is coming from.

We’re sick of the phrase “kicking the can” and given we are midway through the European Football Championships we should maybe change it to “passing the ball”. It is our view that the ball should now be passed to Italy, and then France and we should start looking at all banks and try and secure them while the political impetus is there. If we don’t, we’ll just have the same arguments in 6 months’ time.

Today is all about German IFO and following the dips in the ZEW number and the manufacturing PMI earlier in the week it would be a surprise if we do not see a fall in both the current climate reading and the expectations for the future. It’s a bit of a toss-up whether we see the open sold further as Europe opens up but the IFO reading could be a catalyst for further losses.

Indicative Rates Sell Buy
GBPEUR 1.2432 1.2459
GBPUSD 1.5597 1.5621
EURUSD 1.2531 1.2554
GBPJPY 125.36 125.61
GBPAUD 1.5544 1.5579
GBPNZD 1.9820 1.9849
GBPCAD 1.6042 1.6070
NZDUSD 0.7856 0.7877
GBPZAR 13.05 13.10
USDZAR 8.3583 8.3905
GBPPLN 5.2974 5.3379
EURJPY 100.69 100.95

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered, Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.

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