Bankia Begs Spain?s Government For ?19bn, Sending EUR USD Rate To 22-Month Low

Published: Monday, 28 May 2012 09:00 BST - Written by James Fuller

STORY LINK Bankia Begs Spain?s Government For ?19bn, Sending EUR USD Rate To 22-Month Low

The weekend close in the currency markets has seen concerns grow over the future viability of Spanish retail bank Bankia. It has been reported that the troubled Iberian company has approached Spain’s government with a request for some €19bn of additional capital which it requires in order to shore-up its tattered balance sheet. Early indications suggest that the Madrid government may be willing to provide Bankia with this amount of government bills, with a view to these subsequently being converted into instant liquidity by the European Central Bank. It remains unclear whether this proposal has been ratified by Germany.

Investors holding euro-denominated assets fear that Bankia’s crisis is merely the tip of a liquidity crisis in the Spanish banking sector. A ‘hard default’ by Greece later this summer would place significant additional stress on Spain’s banks, testing this theory.

The markets reacted to Bankia’s developing problems at the end of last week’s session, by turning further against the beleaguered euro and supporting the safe haven US Dollar. This saw the EUR USD exchange rate tumble to 1.2496, its lowest level since July 2010, during Friday’s session. However, the pair has price-gapped upwards at the start of this week’s session, opening last night at 1.2555, significantly above Friday’s close of 1.2518. If this price gap is not closed in the near-term, then that would be considered a positive indicator by technical analysts.

Looking ahead to this week’s session, the major risk event of note comes on Friday with the release of May’s US Non-Farm Payrolls data. Thursday brings the release of German unemployment figures and US GDP data. With the exception of these set-piece releases, investors will be focussing on the eurozone’s long lingering death dance.

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