Pound To Euro Rate Gains As Spain?s Debt Yields Head Towards 7%

Published: Wednesday, 13 June 2012 09:00 BST - Written by John Cameron

STORY LINK Pound To Euro Rate Gains As Spain?s Debt Yields Head Towards 7%

Although this weekend’s news of the eurozone finance ministers’ bailout of Spain’s banking sector was clearly good news for Spain’s banks, it is already proving to be a millstone around the neck of the Spanish government. The potential that as much as €100bn of emergency loans will be made available to the Iberian state’s government has had a massive impact on the country’s debt-to GDP ratio, which is the key piece of information used by bond market participants in order to make a judgement on teat country’s bills.

Leading ratings agency Fitch provided an instant verdict on the effect that Spain’s banking bailout would have on the country’s national finances when it cut the country’s debt rating earlier this week. Yesterday’s session saw matters get worse for Spain, as the yield it pays on its benchmark 10-year bonds rose to close to 7.0% - this is the threshold above which a nation’s debt is considered unsustainable. To add to the mood of gloom in the eurozone, Italy’s bond yields were also on the up yesterday, pushing well above the 6.0% level by the middle part of yesterday afternoon’s European session. This added to the feeling that the region’s debt situation is getting out of control.

Elsewhere, there was further disappointing data released in the UK yesterday morning, as April’s Industrial and Manufacturing production numbers came out lower than expected. The manufacturing data was particularly weak in tone, showing a monthly drop of some 0.7%, against analysts’ expectations of a month-on-month contraction of just 0.1%. The numbers build on a series of poor British data releases, which included last month’s worryingly poor Retail Sales numbers and the UK government’s downgrading of the nation’s Q1 GDP growth number from -0.2% to -0.3%. Without the poor UK manufacturing and industrial production data, the GBP EUR exchange rate would surely have broken above the 1.24s which were seen yesterday, given the news from Europe.

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