Pound To Euro Exchange Rate Eases In Spite Of Spanish Debt Yields Spiralling To 7%

Published: Friday, 15 June 2012 09:00 BST - Written by Toni Johnson

STORY LINK Pound To Euro Exchange Rate Eases In Spite Of Spanish Debt Yields Spiralling To 7%

Spain was making the headlines in the currency markets yesterday, and again it was for all the wrong reasons. For the past few weeks, the interest the Spanish government had been paying on its 10 year bonds has been edging higher. The increased yields on Spanish bills have been precipitated by deep-seated concerns regarding the nation’s banking sector, which emerged when leading retail bank Bankia approached the Spanish government for assistance in plugging the €19bn gap in its balance sheet. Last weekend saw the eurozone announce that it was making up to €100bn of emergency loans available to Spain’s ailing banks. For a few hours, this eased the pressure on Spain. However, the respite was short-lived, as analysts quickly pointed out that the emergency loans would cause a deterioration in the country’s debt-to-income ratio – a key indicator used by market participants in judging the fiscal well-being of a nation. So effectively, Spain’s centre-right government has nationalised the massive debts of its retail banks. Predictably, this has not played well with bond market participants, who turned against Spanish gilts in their droves during yesterday’s session, sending the yields on the country’s 10 year bills to 7%. This is the key level considered untenable by analysts in the short-to-medium term.

Yesterday’s tipping point for Spanish bonds was provided by leading credit ratings agency Moody’s, who announced that they were cutting the country’s credit rating from A3 to Baa3 – a level which is only one notch above ‘junk’ status. Surprisingly, the euro held up well against both the Pound and the US Dollar on the day, with the GBP EUR dropping to 1.2317. The move lower for the pair went against the prevailing fundamentals, suggesting that it was technical in nature – many commentators have pointed out that the pair rose a long way in a short space of time over the past three months. In truth, it looked a little overbought at close to 1.2600, so some downside was always to be expected.

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