Fears Over Creditworthiness Of Spanish Retail Banking Sector Take Pound To Euro Exchange Rate Higher

Modified: Tuesday, 18 September 2012 18:12 BST - Written by John Cameron

STORY LINK Fears Over Creditworthiness Of Spanish Retail Banking Sector Take Pound To Euro Exchange Rate Higher

Yesterday’s session in the global currency markets brought renewed fears regarding the health of Spain’s down-at-heal retail banking sector after the country’s central bank revealed that the debt-ridden Iberian state’s banks are collectively holding a record amount of bad debt. The Bank of Spain’s numbers showed that a whopping 9.9% of the country’s bank loans are currently in arrears. The shocking figure illustrates the decimating effect which the sharp downward move in Spanish property prices, which followed the global credit crunch of 2007, continues to have on Spain’s economy. The contraction of global credit markets has had the additional effect of constricting the flow of funds into Spain’s business sector, as banks are increasingly reluctant to ‘take a punt’ on lending to businesses for fear of eliciting a yawning hole in their balance sheet. All in all, the situation appears bleak for Spain as a whole and it seems increasingly likely that the tens of billions of euros worth of emergency funding recently made available to Spanish banks will not be enough to plug the gap left by the difficult trading conditions of recent years.

The news from Spain saw the GBP EUR exchange rate trend higher on the day, in spite of the release of a stronger than anticipated ZEW Sentiment Survey in Germany. The Pound to Euro exchange rate improved throughout the day to break back above the 1.2450 level at the UK equities close.

Elsewhere, yesterday afternoon saw the release of the latest US Current Account data, which showed that America’s trade gap registered at a slightly lower than expected US$117.4bn in the three months to the end of June. As has been the case with recent trade numbers from major economies, the release cast doubt on the ongoing strength of the global economic recovery. The fact that the world’s leading economy is exporting a lower volume of goods and services than had been anticipated raises serious question marks regarding the ongoing levels of demand from its sizeable export markets. Such doubts have the potential to cause a safe-haven shift of funds into Greenback-denominated assets which could rapidly reverse GBP USD’s recent uptrend.

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