terms agreed for Spanish Banks

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Yesterday’s meeting of the European Finance Ministers was a long and arduous process that lasted into the early hours of this morning. The main item on the agenda was the Spanish Banks and how involved the European bail-out funds were going to get. The need for swift action was at the fore-front of proceedings. In the build up to the meeting, German Finance minister, Mr. Schauble made it abundantly clear that he was against direct bank recapitalisation without a tighter banking union, something that could not happen over-night. It had the makings of a long night for the ministry. Other issues on the table for the meeting are the renegotiation of the Irish bailout and Greece’s compliance with its financial programme.

Ten hours (and plenty of coffee breaks) later they decided on a 30 billion Euro first instalment to be paid by the end of this month. The previous 100bn figure that was pledged last month is still available but is being held in reserve until a much more detailed review of the sector’s problems can be carried out. This is expected to take until Aug/Sept.

Further pardons were granted to Spain alleviating the pressures on deficit targets for the year. Madrid’s target this year has been loosened to 6.3% of GDP, from 5.3% earlier. As expected, Madrid was also given a year long extension to bring its deficit target below 3%.

The main issue on the table however has always been the terms of the bailout and the level of involvement of the bailout mechanisms. Conditions attached to the bail-out include increased supervision and regulation, in the form of bank-by-bank stress tests, conducted externally. The European Financial Stability Fund is to act as the agent for buying government bonds, should it need to step in. To avoid adding to the mountain of ominous government debt already on the banks books, all risk from any new buying is to be transferred to the EFSF.

GBPEUR traded within a 50 pip band throughout yesterday with little to no reaction in the Asian session to the news from Spain. We may see a slight Euro rally this morning breaking back into the low to mid 1.25’s but as is now becoming the norm, any kind of Euro rally is short lived as there is generally no real backbone to any movements.

Chinese trade balance figures released early this morning, showed a huge decline in imports as China continues to focus on domestic consumption based growth. Deflationary pressures are now mounting on China similar to the situation we saw in Japan earlier this year as it battled to reduce debt levels quickly.

Much busier day today data wise, we have trade balance figures for the UK along with Industrial and Manufacturing production out by 9.30. Perhaps today we may see GBPUSD move outside of the very tight bands we have been trading at for the last few days now. Round II of the Finance ministers meeting today.

Stay tuned…

Latest exchange rates at time of writing

Indicative Rates Sell Buy
GBPEUR 1.2590 1.2618
GBPUSD 1.5495 1.5517
EURUSD 1.2288 1.2312
GBPJPY 123.29 123.56
GBPAUD 1.5195 1.5211
GBPNZD 1.9449 1.9478
GBPCAD 1.5784 1.5813
NZDUSD 0.7954 0.7973
GBPZAR 12.76 12.81
USDZAR 8.2264 8.2675
GBPPLN 5.3305 5.3573
EURJPY 97.75 98.00

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