Fears Grow Over Italy?s Debt As Italian Bond Yields Spiral, Taking Pound To Euro Exchange Rate Higher

June 12, 2012 - Written by Minesh Chaudhari

STORY LINK Fears Grow Over Italy?s Debt As Italian Bond Yields Spiral, Taking Pound To Euro Exchange Rate Higher

The currency market giveth and the currency market taketh away. Or so it appeared yesterday, which was the first full day of trading following Saturday’s announcement by the eurogroup of Finance Ministers that it was set to make up to €100bn of emergency loans available to Spain’s banking sector. The day started with significant gains for the single currency as market participants expressed their relief that the Spanish retail banking sector was not going to disappear into a black hole of debt. Not this week, at least.

However, by the close of yesterday’s European session, the euro had given up all of the early gains which it had made against the Pound and the Dollar, and incurred further new losses. Stock markets were also under pressure, after initially registering healthy gains in early trading – London’s FTSE 100 closed down slightly and tellingly, Madrid’s IBEX lost over half a percent of its value on the day, in spite of news of the rescue plan.

Although the Spanish bailout allayed fears regarding the country’s banks, there were plenty of other reasons for concern for investors holding euro-denominated assets. Primary amongst these was the state of Italy’s finances. These concerns caused the yields on the benchmark 10-year Italian bond to spiral to 6%, as market rumours swirled concerning a potential bailout. It increasingly appears that eurozone policy-makers are fighting a debt fire which they are unable to extinguish.

Yesterday’s session was light on significant data releases, allowing investors’ minds to wander – bad news for the euro. Today sees a little more in the way of data-driven risk events, with the release of UK industrial and manufacturing production data, as well as the closely-watched NIESR GDP Estimate for May.

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